How to make the most of your performance appraisal

It is that time of the year again. The annual appraisal form has dropped in your mailbox. Like so many others, you sit on it till deadline looms. Then you scamper to fill it by copying from colleagues and get over with the formality. This, however, is not the right way to go about it; nor is it a good idea to see your appraisal as a mere formality.

As an employee who has gone through umpteen performance appraisals, here are a few tips to do a better job on these. Remember, however, that there is no substitute for hard, intelligent work on a consistent basis.

Making a case for promotion

Start now: Most companies set 'time windows' when managers can promote employees. This means that the staffers who want to move up during this period should talk to their managers about it a couple months beforehand. If, in your case, the next window is in April, then you should meet your manager now.

If you wait till the performance review in April, it could be a case of missed opportunity, with no option but to wait for the next window. Companies usually decide on the number of promotions and even the people they want to promote a couple of months before the actual review date. It is, therefore, important that your case is presented well before your boss starts working on the appraisal for his team.

Ideally, you should set the stage for a promotion by keeping your bosses informed throughout the year about your successes and desire to move up.

Record your successes

Keep a diary: Memories are short. Our bosses forget the good things we have done and remember only the times we goofed up. It is your duty to record your successes and highlight them in the performance appraisal. These successes could be an e-mail from a customer thanking you for solving a problem, even a mail from your boss or his boss congratulating you for surpassing the target.

Keeping a log of such achievements will help you put a structured argument in your appraisal. Also, before you start filling in the form, decide on your objectives. Is it a promotion, is it a grade change or is it a transfer that you want?

Every statement of yours should be supported by facts

Keep it short and sweet: Every statement of yours should be supported by facts. And do not exaggerate. Don’t write long sentences like, “I am a loyal worker and I live, breathe and think about our company all the time...” All your remaining claims will also be taken with a pinch of salt.

Remember, you are appraised every day by your boss and the appraisal form is just a way of reminding him of what he may miss out.

When asking for a raise

The first thing you can do is to check your worth in the industry. Several websites like Salary.com give expected salary ranges based on your position, location and experience. Sometimes your colleagues would also have posted their salaries on websites like GlassDoor.com. This helps in knowing your true value and helps you while negotiating with your boss.

The second thing to keep in mind is that if asked for your salary expectation, never give a figure first. If your answer is too high, you may be seen as greedy and over-ambitious. You may even be deprived of the promotion that is on the horizon. You aim too low and your boss will either think you’re not qualified or desperate. So, if possible, write ‘NA’ on the application.

Don't blackmail the employer

Occasionally, employees make the mistake of thinking that blackmailing the employer can be a good strategy. You may want to tell your boss that you will leave unless you get a promotion and a significant jump in salary. If your boss has no alternative, you may get it in the short term.

But remember that bosses have long memories and will try and develop others within the company so that they don’t have to depend upon you. From that point on, you might face trouble in negotiations not just with your employer, but with everyone in your industry who has heard about it. Word gets around.

What the company expects

The right attitude: This can mean staying long hours when required, or volunteering for that extra bit of work which others want to avoid.

Your output: Sales people are measured on target achievement. So are production people. The majority of the work force today is white collar employees working in back-office accounts, customer service, etc. Here the standards are not easy to measure. If you are in such a role, then it should be your responsibility to work out your ‘target’ with your boss.

Your loyalty: The longer you stay in your company, higher the chances of your promotion.

When you get an offer

Don't take the first offer that you get. Most employers expect candidates to try to negotiate. So ask for time and come back the next day or next week with a higher figure, which you think the boss will agree to.

Once your salary increase is locked in, go for other benefits. You can ask for facilities, such as working from home, study loans, sponsorship by company to management programmes which can help you in your job. If you still feel your package is too low, ask if it can be reviewed again in six months. In this manner, you can show them that you’re worth the money.

At the cost of repeating myself, do remember that the appraisal season starts before you are given the appraisal form.

By Kris Lakshmikanth, CEO & Managing Director, The Head Hunters India

Curtesy: ET

Tips to grow your money the safe way

Plain-vanilla fixed income assets can pump up the savings of not only the retired, but also those of young professionals.

You won’t catch them dead near the stock market. They are very happy putting away their hard-earned savings in fixed deposits, public provident funds, company deposits and so on. And not all of them are retired individuals who do not want the uncertainty of stocks ruining the fun of their sunset years.

There are many young executives, who don’t want to take the extra risk of investing in stocks. While a retired individual wants a monthly income to meet his day-to-day expenses, the working individual looks at building a fixed-income corpus to save for a rainy day or emergencies which may come his way. According to an India Wealth Report 2010 by Karvy Private Wealth, as much as 66% of Indian wealth, which is around Rs 48 lakh crore, is in fixed income assets.

Compared to this, global investors invested only 58% of their individual wealth in debt instruments during the same period.

Fixed income investors are generally risk-averse, want safety of principal and do not believe in churning their portfolios too much. They also want their investments to be as simple as possible.

There was a time when fixed-income investors earned as high as 12% by investing in bonds of reputed companies such as Tata Capital and Shriram Transport Finance or fixed deposits (FDs) of companies like Telco (now Tata Motors) and Mahindra Finance. However, that was during the global financial crisis in 2008-2009. With the crisis receding, earning double-digit interest on FDs is no longer possible.

No wonder, 2010 has been a tough year so far for fixed income investors. Inflation has sky-rocketed and remained in double digits for a major part of the year. The Reserve Bank of India raised rates five times during the year, in a bid to rein in rising inflation. However, banks were flush with liquidity and did not raise interest rates.

So, while inflation was close to 10%, interest rates were in the range of 6-7% per annum. As a result, investors got negative real returns from their fixed income investments. Simply put, when an investor gets 7% from his FD while the inflation rate is 10%, he actually earns negative returns.

Typically, fixed income investors have choices such as FDs (bank and company FDs), debt mutual funds (liquid funds, income funds, gilt funds, fixed maturity plans) and post office investments like National Savings Certificates and 8% Government of India (GoI) bonds. Fixed deposits account for 30% of the overall individual wealth in India, while small savings constitute around 7% of the estimated wealth in India. Here, we take a look at some solutions for retired and working individuals:

Retired Individuals: Typically, an individual, who has worked during his active years, receives a lump sum on his retirement. Safety of capital is of prime importance to him. His objective is to generate a monthly income out of this corpus to sustain his lifestyle, some lump sum money for his children’s wedding or education and some surplus money to take care of medical emergencies or to go for a dream vacation as the case may be.

Safety is one of the biggest priorities for retired individuals. The Senior Citizens Savings Scheme, which gives 9% per annum payable quarterly, meets this important need. Individuals, aged 60 and above, and retiring employees, aged 55 and above, can invest in the scheme. The scheme has a five-year tenure and can be extended further for a period of three years.

“This is the highest return that a retired individual can get with the highest degree of safety from the central government,” says Uttam Agarwal, executive vice-president, Bajaj Capital , who advises retired individuals to invest in this scheme. However, one must note that premature closure is possible only after one year, with a nominal penalty.

If individuals want a monthly income, they can opt for a post office monthly income scheme (MIS), which gives a return of 8% per annum. Here, the maximum limit is Rs 4.50 lakh in a single account and Rs 9 lakh in a joint account. Here, too, premature closure after one year attracts a penalty of 2% while closure after three years attracts a penalty of 1%.

Investors can also look at company FDs, where in some cases the returns can be as high as 9.5-11%, though they do carry a higher risk compared to government schemes. “We advise senior citizens to invest in companies with AA or AAA rating and spread their investments across a number of companies,” says Anup Bhaiya, managing director, Money Honey Financial Services.

Remember, don’t go by returns alone while zeroing on company FDs, as many retired people often fall victim to bogus companies offering high interest rates. However, when it comes to getting the capital back, they realise that the company has folded up.

When it comes to mutual funds for retired investors, fixed maturity plans (FMPs) and short-term income funds are considered the best bet.

“FMPs give you the benefit of indexation and returns could be in the range of 8-8.5% for a 1-3 year tenure,” says Ramanathan K, chief investment officer, ING Mutual Fund.

Working Individuals: We are assuming that you are averse to taking risks and, hence, do not want to invest any money in equity. Also, you may have some loans, like home and car loans, to repay. So, liquidity will be of prime importance to you, as the accumulated surplus money can be used in times of emergencies or fulfil short-term goals like a vacation. 

So, what kind of strategy should such young risk-averse people adopt in a rising-interest rate scenario? “He could invest some amount in a post-office MIP, and if he does not want the monthly income, he could further invest it in a post-office time deposit,” says Anup Bhaiya. In addition to this, he recommends company fixed deposits, as they give a slightly higher return than other products.

“He can invest in short-term income funds, as they offer ample liquidity, are tax-efficient and could give returns of around 7-7.5%,” adds Ramanathan K. “Such investors should invest in a combination of FMPs (fixed maturity plans) and short-term income funds. The duration risk in short-term income funds is low as they have a maturity of 1-2 years,” adds Pankaj Jain, fund manager, Taurus Mutual Fund .

However, experts believe that younger people should invest at least a small portion of their corpus in equities, as they can add sheen to their wealth. 

Short ‘N’ Sweet

Here are some ways to grow your money without investing in equities

If you have an investment horizon of 6-12 months, then you should opt for short-term income funds that give 6-7% returns

Go for fixed maturity plans (FMPs) of 370 days and reap the benefit of indexation for up to 8%

Invest a part of your money in company deposits for three years and earn returns as high as 10%. However, don’t get swayed by the promise of returns alone. Always stick to a company with an AAA or AA rating

You can switch from short-term income funds or liquid-plus funds to income or gilt funds, depending on the prevailing interest rates

Senior citizens can invest up to Rs 15 lakh in 9% Government Savings Scheme. They can also go for post office monthly income plans that give 8% returns per annum

Do not make the mistake of keeping too much cash in your savings account as that will earn the lowest interest. 

For greater liquidity, you could invest in Equities. (Share/ Funds)

Curtesy: ET

Note: To invest in Shares you need DMAT and Trading account.

 

How much tax do infra bonds really save?

The IDFC Infrastructure Bonds issue joins five other issues this financial year. A similar issue by Rural Electrification Corporation is already open. By investing in these products, taxpayers can claim a deduction of up to Rs 20,000 under Section 80CCF. This is above the Rs 1 lakh invested under Section 80C. While you save tax, your real returns may not be as high or precise as those being projected by some brokers. So before you rush to invest in the issue, here are a few points to ponder.

Good for saving tax:

IDFC bonds have a tenure of ten years and offer 8% interest on both the annual payout and cumulative options. The effective rate of return rises if you account for tax savings. The higher the tax bracket, the more the tax-saving potential. That means taxpayers in the 30% tax bracket will earn marginally higher returns than those falling in the 10% tax bracket.

If the company buys back the bonds after the lock-in of five years, the effective return would be 12.1%. This is higher than what most fixed income instruments will offer.

Don't believe in projections:

Your broker might try to lure you with calculations that show spectacular returns of up to 17-18% in case of a buyback of the bonds by the company after five years. Such a high rate looks probable only because there is a flaw in the assumptions. But the real rate of return is revealed when you crunch the numbers. First, to project high returns, it is taken for granted that the investor falls in the top tax bracket.

Now, considering tax savings of Rs 6,180 (30.9% of Rs 20,000), the actual investment drops to Rs 13,820 (Rs 20,000–Rs 6,180). The rate of return on this (using the concept of internal rate of return), considering the 8% earned every year for 5 years and the buyback at Rs 20,000, works out to about 18%. The problem with this figure, however, is that it assumes that the interest earned is tax-free, which is not the case. It also assumes that the interest earned every year is reinvested at 18% for the remaining tenure.

Also, the interest further earned on the reinvested amount is assumed to be tax-free, which again is incorrect. When accounted for all this, the effective return declines to about 12% —assuming that the interest is reinvested at 8% and the interest earned on the reinvested amount is taxed at 30.9%.

Remember buyback dates:

Both issues offer a buyback option to investors after the five-year lock in. It is best to exit at the first opportunity and reinvest the proceeds in other, more lucrative options. If you miss the window that opens for a specified period, the company may not buy your bonds. However, you can still sell them.

The bonds will be listed on major exchanges and you can sell them like any other security in the secondary debt market. Keep in mind that it is not easy for retail investors to find buyers in the secondary bond market.

The average transaction size is in crores of rupees. Imagine how much interest your Rs 20,000 bonds will earn. Add to that issues about capital gains that will crop up if you sell in the secondary market.

What is required:

A self-attested copy of the PAN card has to be enclosed with the application form. A demat account is not necessary because these bonds are in physical form as well. Of course, if you own a demat account, it is better to apply in the demat form. 

Curtesy: ET

Note: we provide DMAT and Trading account.

Holding mutual funds in a demat account

Investors can now hold their mutual fund units in dematerialised form. Investor who own a demat account can use it to hold mutual fund units. It is however not mandatory to convert units into demat form. Investors can also use the electronic platforms of stock exchanges to transact in their mutual fund units through the brokers of the stock exchange.

For this, investors have to use a standard form specified by the depository (CDSL or NSDL) called the conversion request form ( CRF )) or destatementisation request form (DRF). This form is available with the depository participant (DP). The completed form, along with the statement of account (SoA) which shows the unit holdings of the investor, has to be submitted to the DP. The DP will verify and forward it to the registrar and transfer agent, who in turn will confirm the details of units held in the SoA. Units will be credited to the demat account after this confirmation.

1. ISIN: Each mutual fund is assigned an ISIN ( International Security Identification Number )). It can be obtained from NSDL or CSDL and has to be included in the CRF/DRF.

2. Details: The details of each scheme with respect to scheme name, ISIN and number of units held should be correctly mentioned in the CRF/DRF and should tally with the SoA being attached.

3. Holding Pattern
The holding pattern of the mutual fund folios and that of the demat account should be the same, and in the same order.

4. Free & Lock-in Units
Mutual fund units such as those of tax-saving schemes may be subject to lock-in. Different forms have to be used for free and locked-in units of the same scheme even if held under the same folio.

Points to note
Signatures: The CRF/DRF has to be signed by all the unit holders of the folio, irrespective of the mode of operation of the folio.

Transacting with the mutual fund: Once units are dematerialised, investors cannot transact in them directly with the mutual fund or investor service centres. Transactions are routed through the stock exchange platform or through the DP.

Re-materialsation of units: Investors can also make an application for re-materialisation of the dematerialised units and only then transact with the mutual fund. 

Note: We provide DMAT and Trading account .

courtesy: ET

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Why endowment plans are almost always a bad buy

Ulips, which were hailed by insurance agents and companies as magic wands capable of giving you the triple benefits of insurance, investment and tax-saving, are suddenly being branded unappealing, as they are market-linked and thus, volatile.

“The value of your investments in Ulips can yo-yo, so it is better to invest in endowment plans,” goes the new sales pitch. Insurance agents promise potential customers that endowment plans offer stable returns in the form of bonuses declared by an insurance company every year in addition to providing a life cover.

“Recently, I came across a case where an agent convinced a couple to liquidate their investment in a Ulip and switch to an endowment plan instead,” says financial writer Uday Kulkarni. The bait was, of course, the assured returns these plans offer.

“While people often talk about the high-commission structure of Ulips, there is little focus on endowment plans where the charges are simply not revealed. If the commissions are in the range of 8-10% in the case of Ulips, in endowment plans it could be as high as 30-40% in the first year,” he adds.

So now you know where the newfound love of agents for endowment plans comes from. What’s more, with the insurance regulator categorically ruling out measures to cap charges on traditional policies, it seems that the new form of mis-selling is here to stay. On your part, you can stonewall this old-wine-in-a-new-bottle strategy, by asking the right questions and taking a decision on what suits your needs the best on the basis of your knowledge.

Here is the truth about endowment plans.

Behind the opaque veil

By design, endowment policies are debt-heavy—that is, they invest only in approved debt or government securities, and not equities. Consequently, they cannot generate returns comparable to Ulips with an equity component.

“Most endowment policies yield returns of around 5% per annum, which, at best, could up to 6% in some cases, particularly LIC policies,” says certified financial planner (CFP) Pankaj Mathpal.

Or let’s put it this way. Even if the actual returns earned were to cross these figures, you will never know. Why, you may ask.

The answer to that question is that under endowment plans, an insurance company is under no obligation to reveal where your money is being invested or what portion of your money is being invested. In other words, the brochures of these plans do not specify the charges that will be deducted from the premium paid before investing the balance.

Of course, agents are putting this lack of transparency to good use by telling prospective customers that unlike
Ulips these plans have no charges and all their money gets invested. This is not correct. Endowment plans have higher charges than Ulips. It’s just that the insurance company is not obliged to give an exact breakdown as is the case with Ulips.

The products, therefore, lack transparency offered by Ulips, which, despite their much-maligned status, at least gave a clear indication of how your money was being used.

 

High charges, low returns

In an endowment policy, a policyholder is insured for a certain amount. This amount is referred to as cover (or sum assured). Over and above this, an insurance company announces a bonus, which is a certain percentage of the cover, from time to time. When the policy matures the accumulated bonus as well as the cover is paid out.

Before Ulips became popular, agents used the entire concept of a bonus to mis-sell endowment plans. So if you had taken a 25-year policy with a cover of Rs 10 lakh, and paid a premium of Rs 38,000-40,000.

On this, if a company paid a bonus of 5%, or Rs 50,000 (5% of Rs 10 lakh), the agents would go to town telling people that the bonus of Rs 50,000 is more than the premium of Rs 40,000.

Of course, what they did not tell is that this bonus is not payable immediately and also will not compound. Put another way, what this means is that if an insurance company declares a bonus of 5% for the first year of the policy, a bonus of Rs 50,000 would accumulate.

And this Rs 50,000 would stay at Rs 50,000 till the 25th year when the policy matures. This explains the low returns that should be expected from investing in endowment plans.

Ignoring the principle of compounding is primarily why at maturity, the returns are unable to break the 5-6% barrier. This is inadequate if you have a long-term horizon in mind. Remember that there are better (read more remunerative and liquid) investment avenues at your disposal.

“When someone is looking to invest for a long period of time, debt instruments (where endowment policies invest) are not the ideal vehicles. In that context, I would say endowment plans are not advisable,” feels Suresh Sadagopan, principal financial planner, Ladder 7 Financial Services.

Instead, you could look at investing the money in a diversified equity fund for the long term. Also those who are not comfortable with equity can try a combination of investing in a public provident fund and getting a term plan. As can be seen from the table on the left, that is indeed a better bet.

So, the next time your agent tries to entice you to buy an endowment policy by dangling the carrot of yearly bonus that exceeds the annual premium, remember that at the end of day, it is the accumulated corpus that matters. A simple term plan along with a large-cap equity mutual fund can do better than a complex endowment product. 

Courtesy: ET

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Mobile Number Portability: Frequently Asked Questions

The long-awaited mobile number portability finally became reality on Wednesday, empowering consumers to change providers conveniently.

What is mobile number portability?

Allows subscriber to opt for service provider of his choice but retain his mobile number. The number gets ported to the new provider.

Mobile Number Portability: Does it allow a technology switch?

Subscriber can stay with same technology, GSM/CDMA. Also change to CDMA or vice versa. Both post-paid & prepaid subscribers can use it.

How long will it take to port a number?

Seven working days. Fifteen days in J&K , North-east

How expensive?

Will cost Rs 19, to be collected by new service provider.

Can you retain your number in another city?

No. You can’t change circles.

How frequently can you switch service providers?

A subscriber must be with a provider for at least three months.

The process- Step 1

To switch, send the following text PORT mobile number to 1900.

You’ll get an eight-digit alphanumeric code and expiry date for it. This is the unique porting code.

 The process-Step 2

Approach service provider you have opted for with unique code. Carry address & ID proof/ photograph/ application form with unique code & mobile number. Complete this process within the expiry date that came with unique code

Operator will take request to mobile portability clearing house. Clearing house will get your number deactivated from existing provider and activate new one.

The process- Step 3

You’ll then get text from new provider mentioning date & time when phone will go through a no-service period.

This is when switching of service providers will happen. Phone will be out of use for couple of hours — between 12 pm and 5 am.

Courtesy: ET

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This year don’t buy insurance to save tax

Your life insurance plan will give you tax breaks this year but it might not be eligible for deduction after the proposed amendments in tax laws. Here is what you should consider when you buy a policy.

Almost 70% of all insurance policies is bought in the last three months of a financial year. This indicates that many of these plans have been bought with the sole purpose of saving tax. The majority of buyers don’t care what they are buying as long as it helps them save tax.

If you are such an investor, be careful when you buy an insurance policy. Your investment will give you tax breaks this year but may not be eligible for any deduction in the coming years. The proposed Direct Taxes Code (DTC), which comes into effect from 1 April 2012, has laid down very stiff conditions for the deduction of the premium from the taxable income and the exemption for income from insurance policies.

One of the key insurance-related provisions of the DTC is that a policy will not be eligible for tax deduction if it offers a life cover of less than 20 times the annual premium.

This means if the premium of an endowment insurance policy or a Ulip is Rs 20,000, it should offer a life cover of at least Rs 4 lakh to be eligible for tax deduction in the coming years. If this condition is not met, not only will the premium lose tax benefits but even the income accruing from the policy will be taxable.

It has been often said that life insurance should be used as a wealth protector, not a wealth creator. One should have a cover big enough to settle all outstanding loans as well as create a corpus of 8-10 times the annual income. If a person’s gross annual income is Rs 6 lakh, he should have a cover of at least Rs 48-60 lakh. However, the average insurance cover per policy in India is less than Rs 1 lakh.

But instead of term insurance plans that provide a large cover at low cost, Ulips and endowment plans are more popular with investors. The bigger loss is that the risk cover these policies offer is so low compared to what an individual needs that it is almost meaningless. What’s more, since the premium of traditional insurance plans is very high, a policyholder is not in a position to buy more life cover for himself.

A term plan for a risk cover of Rs 50 lakh would cost a 25-year-old man less than Rs 6,000 a year. A simlar cover from a Ulip or an endowment plan would come for at least Rs 2-3 lakh.

This may have to change after the DTC kicks in. A major game changer for life insurance is that the tax deduction limit will get reduced from the present Rs 1 lakh a year to only Rs 50,000 a year under the DTC. That’s not all.

This Rs 50,000 limit would also include the amount paid for tuition fees of children as well as medical insurance. Hence, there won’t be too much head room left for a big premium paid on an insurance policy.

There are other things to keep in mind too. Insurance agents like to lure buyers by saying they can withdraw from their Ulips after a few years. This lock-in period used to be three years but the Insurance Regulatory and Development Authority has extended it to five years.

Nonetheless, it is a widely used ploy to sell Ulips because partial withdrawals are tax-free. Right now, any income from insurance is tax-free except the premature surrender of a pension plan or a Ulip before five years. But under the DTC, withdrawals from Ulips will attract capital gains tax on the basis of the holding tenure.

If you still want to buy an insurance policy to save tax, make sure that the life cover it offers is big enough. This would be possible if you take long-term plans (at least 20 years). Your agent might try to dissuade you from opting for a higher risk cover in your Ulip. He would point out that a higher deduction for mortality charges would reduce the funds available for investment. Don’t let that make you opt for a plan that might lose all tax benefits two years from now. 

 

For investors who are comfortable taking risks, equity-linked saving schemes are a better way to save tax. These funds have given high returns in recent years and have a lock-in of only three years, which is the shortest for any Section 80C option. But being equity-oriented funds, they are subject to market risks and one should enter only if he can stomach the ups and downs.

For those with a lower risk appetite, the New Pension Scheme (NPS) is a great way to save tax. NPS investors have the choice of investing in funds managed by six mutual fund houses.

The NPS allows up to 50% equity exposure and the charges are negligible compared to the terribly high costs of investing in a Ulip or a unit-linked pension plan from an insurance company. But NPS is not as liquid as ELSS funds and investments that get tax deduction cannot be withdrawn before retirement.

 

By Sudhir Kaushik, Co-founder & CFO, TaxSpanner.com 

Why you should not pull out your FD

Banks have been raising interest rates on fixed deposits of various tenures by 0.5-0.75% in the past two weeks. A three-year FD in the second week of December 2010 was earning as much as 8.30-8.50%. The interest rate has since swelled to 9%. A senior citizen might even earn 10% by picking the right bank FD.

In this backdrop, it is tempting to withdraw an FD and deposit the money with a bank offering a higher interest rate. Here is why you should not rush.

Banks usually levy a penalty in the form of a 0.5-1% lower interest on customers looking to ditch their account for a rival’s.

"When the interest rate goes up in quick succession, people will start breaking existing deposits. Bank will feel the pressure," says S Govindan, general manager of personal banking and operations department at Union Bank of India. Banks are okay with customers reinvesting money with them, though there are exceptions.

HDFC Bank is one. The bank has said it will charge a 1% penalty on premature withdrawals for all fixed deposits, including sweep-in FDs (accounts that combine savings-current and fixed deposit features) and partial closures, from 24 January 2011.

ICICI Bank already charges a 0.5-1% lower interest rate to end an FD. The penal interest is 0.5% for a one-year deposit and 1% for deposits below `5 crore but with a higher tenure. A spokesperson of ICICI Bank said the penalty applies even if the money is re-invested.

Not every bank imposes a sweeping fine on withdrawals. IDBI Bank said last week it will not fine new or renewed FDs opened from January 1, 2011.

The penalty of 1% lower interest when people renew existing FDs or open a new deposit will now be waived off, says RK Bansal, executive director and chief financial officer of IDBI Bank.

It is a customer-friendly measure, says Bansal. People want to re-invest when rates rise, he says, though FD termination creates an asset-liability mismatch for the bank.

Like IDBI, public sector counterparts such as State Bank of India , Bank of Baroda , Punjab National Bank and Union Bank of India also impose a charge on premature withdrawal, even if it is partial. There is no fine on a deposit renewed for higher interest rate, said officials of these banks.

UBI’s Govindan says there was always a penalty on breaking an FD. UBI charges a lower interest rate of 1% on an FD removal. "But if you re-invest the same amount for a period higher than the remaining period of the original FD, the penalty is waived off," he says.

The waiver is paying off. "We are seeing people who were in for the shorter term are breaking existing FDs and going for the longer-tenure FDs because of the attractive interest rate," says Govindan.

The Reserve Bank of India had asked banks to allow conversion of fixed, recurring or daily deposits for reinvesting without reducing the interest as a penalty. In April 2010, RBI reversed its stance, saying banks can decide their own charges if people convert deposits to earn higher interest.

The leeway to banks means a rethink on pulling out money is in order. For a customer, it pays to calculate the penalty as some banks do not tell upfront about the charges while ending an FD prematurely. The accompanying tables will help you decide.

"Breaking an FD is helpful to a customer only if there is a rapid increase in interest for two weeks or one month as we have seen now," says Govindan. "If the rate moves up in the range of 300 bps (3%) in quick succession, you benefit."

 

This article first appeared in ET wealth 

Performance of Long term calls

Gujarat Fluro Chemicals made 52 week high -252 in Falling market
By Gods Grace  35%   returns within 40 days...

What to learn from this?

Sensex and nifty numbers doesnt matter much.

Quality stocks never let you down.

Puri Effect

Citibank’s rogue relationship manager apparently blew up most of the money he ‘diverted’ on the stock markets. Specifically, he seems to have been trading in Nifty derivatives. I almost wish that he had instead run off with the money and was sunning himself on a beach in the Caribbean, wearing a false beard with the money safely laundered into a Cayman Islands account. But alas, it was not to be. Like traders around the country, he found the lure of ‘effendo’ too strong.

Even though ‘effendo’ sounds like a magical spell from Harry Potter (like Confundo and Diffindo), it is not. It is the popular way of pronouncing F&O, otherwise known as futures and options!

But Effendo seems closely related to a Harry Potter spell called Evanesco which makes things vanish. Effendo can make money vanish as if by magic, as it did for Shivraj Puri and his victims.

Now I know the whole story about how derivatives provide depth and breadth to the stock markets, but for a vast majority of retail investors, they are none of that. Instead, as Warren Buffet pointed out, they are nothing but financial weapons of mass destruction.

According to the Gurgaon police, Puri purloined Rs 300 crore, leveraged it up to Rs 1,200 crore and then managed to shrink that down to Rs 175 crore when, in November, the Nifty refused to behave as he had expected it to.

The only thing unique about his story is the scale and the fact that he had stolen the money he was using. There is no shortage of people who are using their own money and losing most of it. The root cause is the widespread promotion of derivatives as a magical way of making money without risk.

The strange thing is that since short-term investing is effectively a zero-sum game, this is sort of true. There are people out there who made the money that Puri lost.

However, if you think there’s an easy, simple and risk-free way of doing that, you could well be on your way to be becoming your own Shivraj Puri!

This column first appeared in the Hindustan Times on 10 January, 2011

Wish to Investing In Gold ETF?

Investing in gold through Exchange Traded Funds is a good and safe option. Since gold ETFs invest directly in physical gold, the buying and selling price of all 10 funds ( Provided by different Mutual Fund houses)is identical. The returns generated by gold ETFs at any given point of time are also similar. There will be avery small  difference between the schemes because of their different expense ratios. So, when investing in a gold ETF, go for the one that is the least expensive. 

To invest in gold ETFs, you will need to have a demat account.

Contact us for  DMAT and Trading account.

On occasion of Swami Vivekananda Birth Day-- National Youth Day India

Recent performance

By Gods Grace,

Even in falling market
Hexaware achieved short term TGT of 5%
SBI achieved short term TGT 5%
Gold B@ 20320 S@20380--6000 (or 7.5%) profit per lot

Many people asked why calls are less in these 15 days..
Answer is same " We have to protect our capital first,then comes generating capital"

Dont forget the 'Wealth Tax'

With stock markets hitting an all-time high, property market looking up again, and the prices of precious metals such as gold and silver soaring like never before, the Indian economy is on a roll, giving a new fillip to the wealth of Indians. The Credit Suisse Research Institute’s inaugural Global Wealth Report, for instance, finds that total wealth in India has tripled in the past decade to $3.5 trillion, and could nearly double to $6.4 trillion by 2015, if the nation’s economy continues on its current trend. Similarly, the 2010 Asia Wealth Report, produced by Capgemini and Merrill Lynch , estimates the number of high net-worth (those with more than $1m in investable assets) Indians rose to 126,700 by the end of 2009 compared to just 84,000 in 2008, riding on the surge in market valuations and improved economic growth.

Clearly, wealth creation by Indians is in full swing and is also likely to be on the fast lane in the years to come. However, before you start basking in the glory of your new-found wealth, you will do well to remember that this might also require you to pay a different tax called ‘wealth tax’. Wealth tax, in fact, is an annual tax like income tax and is levied on the market value of the property for the benefits derived from ownership of such property, irrespective of whether the property derives any income or not.

“Wealth tax is charged on the net wealth of the tax payer, where net wealth means the aggregate value of all the assets, excluding exempt assets, belonging to the tax payer on the valuation date less the aggregate value of all debts owed by him which have been incurred in relation to these taxable assets,” says Girish Batra, chairman and managing director of NetAmbit Infosource & e-Services.

Wealth tax is currently levied at a rate of 1percent per annum of the net wealth exceeding `30 lakh on the valuation date (i.e. March 31). These provisions are governed by the Wealth Tax Act, which came into force on April 1, 1957. In fact, “every individual, Hindu undivided family (HUF) and companies are liable to pay wealth tax if the combined value of certain assets they own at the end of a fiscal year exceeds Rs 30 lakh. However, the scope of liability of wealth tax depends on the residential status and nationality of the tax payer,” says Vineet Agarwal , director, KPMG .

Thus, if your net wealth stands at `50 lakh, you will have to pay `20,000 as wealth tax for the given year.
Pensioners, retired persons or senior citizens have not been accorded any special benefits under the Wealth Tax Act. However, there are certain entities exempt from wealth tax, which include any company registered as a not-for-profit organization, any co-operative society, any social club, any political party and any specified mutual fund.
Currently wealth tax is payable on buildings/houses, including farm houses situated within 25 km from the local limits of any municipality or cantonment board (subject to certain exceptions), motor cars, jewellery, yachts, boats and aircraft, and cash in hand in excess of `50,000 for individual and HUF.

Thankfully, there are certain exemptions and exceptions available for taxable assets. For instance, one house, part of a house or a plot of land belonging to an individual or HUF is exempt from wealth tax. Similarly, residential property that has been let out for a minimum period of 300 days in the previous year does not attract wealth tax. Similar is the case with houses for residential or commercial purposes which form part of stock-in-trade as well as houses which the tax payer may occupy for the purposes of any business of profession carried on by him.

Motor cars used by the tax payer for business or running them on hire or as stock-in-trade are also exempt from wealth tax, and so is jewellery that forms part of stock in trade, as also gold deposit bonds. Yachts, boats and aircraft are also exempt if used for commercial purposes. “The Act also provides exemptions with respect to an individual who is either a person of Indian origin or Indian citizen and who must have returned to India from a foreign country for settling down permanently. The exemption is available on the money, value of assets brought into India and value of assets acquired by an individual out of such moneys. This exemption is available for a period of seven years after the person returns to India,” says Agarwal.

There are, however, stiff penalty provisions for non-payment of wealth tax. Under the Wealth Tax Act, concealing particulars of chargeable assets or furnishing inaccurate particulars thereof is construed as evasion. A penalty may vary from one to five times of the tax sought to be evaded. Tax evasion can result into imprisonment of the tax payer of up to seven years along with fine if the tax evaded is over Rs 1 lakh and up to 3 years with fine if tax evaded is lesser than `1 lakh. Delayed filing can result into a penalty of Rs 100-200 per day.

Wealth tax is required to be paid before filing the return of income. The due date for filing the wealth tax return is July 31 following the end of the previous year.

However, if your stress level has peaked, then here comes the breather. In line with the proposals laid down in the revised discussion paper, the Direct Tax Code ( DTC )) 2010 proposes to levy wealth tax at the rate of
1 percent on net wealth exceeding `1 crore (against the existing threshold limit of `30 lakh under the Act). “The proposed change is definitely a welcome step for high net worth individuals who will now have to pay tax on wealth in excess of Rs 1 crore,” says Agarwal.

Batra has a similar view. He says, “Keeping inflationary considerations in mind, it will be a positive step towards the tax payer which is genuinely required in present times. These current limits were fixed way back in 1992 and have not been updated since then. But due to inflation, the valuations have gone up considerably and, thus, the exemption limit does perform the required balancing act.”

Although from the point of view of the government, such a step would necessarily erode the tax base and would hamper the tax revenues from wealth tax. “But considering the fact that the present revenues are not very significant, it would be beneficial for the government too in the long run, provided the list of assets is made more exhaustive,” he adds.

It is, however, pertinent to note that while the proposed law may seem more liberal to many, the trouble is that it has included archaeological collections, drawings, paintings, sculptures, wristwatches worth over `50,000, besides cash in hand above `2 lakh, among other things, into the list that forms wealth. With this there would certainly be disputes over the valuations of these pieces as there is no uniform method to evaluate these things. In other words, there seem to be some taxing times ahead for HNIs! 

Curtesy: ET

How Inflation affects Sensex?

The inflation rate has started having an impact on the Sensex. The Sensex has started rocking because of the high inflation. With its widespread reach, inflation affects all aspects of the economy, and thereby the Sensex.

Last week, the markets fell after a sharp rise in food prices heightened concerns that the central bank may tighten the monetary policy more than expected. The financial stocks were among the big losers as higher interest rates could douse the demand for loans and squeeze the margins of banks.

The food price index rose 18.32 per cent in the 12 months to December 25, the highest in more than a year. The fuel price index climbed 11.63 per cent. In the prior week, annual food and fuel inflation stood at 14.44 per cent and 11.63 per cent respectively. The primary articles price index was up 20.20 per cent in the latest week, compared with an annual rise of 17.24 per cent a week earlier. The Wholesale Price Index, the most widely watched gauge of prices in India, rose 7.48 per cent in November from a year earlier, compared with 8.58 per cent in October.

Though overall, inflation moderated to 7.75 per cent in November from 8.58 per cent in October, food inflation has increased rapidly in the first half of December. High onion prices coupled with that of milk were blamed for high food inflation. This may lead to at least a 50 basis point rate hike in January by the Reserve Bank of India (RBI). One has to be prepared now for a much larger rate hike series than what one was expecting say a month ago. The RBI is scheduled to review the policy on January 25.

Quarterly corporate results due from next week are expected to show robust growth, and investors would be watching for management comments on outlook for direction. Inflation is one of the issues hurting the markets. Earnings should provide more cues on direction. Foreign funds have bought around USD 270 million of equity in the first two trading sessions this year, after pumping in a record USD 29.3 billion in 2010. According to the prime minister's economic advisory council chairman C Rangarajan, the inflation rate could be considered comfortable only when it comes down to four per cent.

He said the rate hike by the RBI will depend on the price behaviour during December and January. If the inflation rate comes down significantly, there may not be any need for action. On the other hand, if inflation remains sticky, then action will be required by the RBI. The RBI last year raised policy rates six times to rein in inflation. However, in its mid-quarterly review in December, the RBI refrained from raising rates since the system was facing a cash crunch.

It, in fact, announced measures to inject Rs 48,000 crores into the system. The RBI, however, cautioned that its measures should not be interpreted as a reversal of the tight monetary stance since inflation still continues to be a major concern.

The rising oil price presents a new inflationary phenomenon and further complicates the task of policymakers. While raising rates can do little to cap cost-driven inflation, it can help cool overall demand and contain inflationary expectations fuelled by a broad rally in the commodity markets.

Rising inflation leads to increase in interest costs, which affects the companies depending on debt finance as the cost of funds increases. This negatively affects the bottom lines of the companies.

Moreover, increase in prices leads to decrease in demand, which again affects the corporate bottom lines.
The purchasing power of people gets reduced. All these cumulatively have an adverse affect on the corporates, and thereby on the Sensex.  

 

Curtesy :  Ashish Gupta,ET

Why stock reports are given for free ?

Are you the kind who relies on research reports brought out by stock broking firms to invest money in the stock market? Well, think twice before you do that again.

Things may not be as straightforward as they appear. To know the real story behind the entire business of broking houses bringing out research reports, read on.

What is a research report?

These days most broking firms that serve retail or institutional investors have a research team. This research team mainly tracks stocks and identifies investment opportunities for investors.

Analysts research companies by understanding their business, meeting the company management and running numbers to check if the current price of the stock is justified. This research is communicated to both existing and prospective investors of the broking firm in the form of a report.

These reports typically carry a recommendation at the start, like buy, hold or sell. If the report flags a buy, the recommendation to the investor is to buy the stock. In case of a sell, the recommendation is exactly the opposite ie, to sell the stock.

A hold recommendation comes somewhere in between and is meant for those investors who already have the stock. The recommendation to them is to hold on to their current investment and not to buy more.

Why are research reports brought out?

There are various reasons for a broking house to bring out research reports. "Whenever a stock brokerage feels a stock is undervalued and clients could benefit by buying that particular stock, the reasons for buying the stock are put together in a research report," says Alok Ranjan, portfolio manager, Way2Wealth.

A stock is supposed to be undervalued, when an analyst feels that the current business prospects of the stock are not reflected in the price of the stock. Given this, they recommend that the stock should be bought because they expect the price of the stock to go up in the days to come.

There are brokers who primarily serve institutional clients. These brokers typically tend to cover large-cap stocks. They bring out reports to update clients on the impact of recent developments, future concerns or business opportunities. Stocks like Reliance Industries, Larsen & Toubro, Infosys and TCS are covered regularly by large broking houses.

These, of course, are some of the reasons why research reports are brought out.

 

Research does not pay

Bringing out a good report with a compelling investment argument is a time-consuming process. "An analyst could take anywhere between a week to month for making a research report," says Sadanand Shetty, V-P & senior fund manager, Taurus Mutual Fund.

Moreover, setting up a research team is a costly process for any broker. The cost involves buying databases which have the numbers necessary to carry out research. Hiring senior research analysts can also cost a bomb. And after incurring all these costs, a research report is given out free.

"Brokerage reports are available free in India, so research is a cost centre," says a fund manager with a domestic fund house. So, why do stock broking firms spend so much money to bring out research reports and then give them away for free?

So what's the real story?

We have seen the genuine reasons why stock broking firms bring out research reports. But there are other reasons as well. As Andy Kessler writes in the book, 'Wall Street Meat', "Companies report earnings once a quarter. But stocks trade around 250 days a year.

Something has to make them move up or down the other 246 days. Analysts fill that role. They recommend stocks, change recommendations, change earnings estimates, pound the table – whatever it takes for a sales force to go out with a story so someone will trade with the firm and generate commissions."

Reports essentially are a medium which allows the sales force of the stock brokerage to go out in the market and sell stocks. And how does that help? For this, investors need to understand the business model of brokers, says a veteran stock broker on Dalal Street. "The prime objective of a research report is to induce a transaction," he adds.

Every transaction gives broking income to the broker, which is his bread and butter. "A report is a tool to sell stocks," says a branch manager at a brokerage house. 

The 'Buy' Recommendation

 In order to sell stocks to investors, it is very important for broking firms to keep coming up with buy recommendations on stocks. As Mitch Zacks points out in his book 'Ahead of the Market', "A buy recommendation has more value to a brokerage firm because it gets the brokers on the phone selling stocks to new clients and opening new accounts."

A buy report ensures that the broking house has a chance to make far more money than it ever would by putting out a sell report on a stock. This is because only those investors who have the stock will consider selling it, so the income will be limited to that extent. This, of course, does not hold for a buy report.

Also, at times, owners of stock broking firms own shares or the broking house owns shares for its portfolio management services' (PMS) clients. If a particular stock does not do well, it is quite possible that a broking firm may release a 'buy' report on the stock. This may tempt investors to buy the stock, thus boosting the stock price. This will give the owner or the broking house an opportunity to sell out of the stock.

What investors need to be careful about?

This, of course, does not mean that no research report can be trusted. Over a period of time, savvy investors learn to separate the wheat from the chaff. "The brokerage from where the report originates, tells me about the quality," says Alok Churiwala, a Mumbai-based broker.

While seasoned investors may be able to differentiate one report from another, retail investors have to trust their broker. So, what should a retail investor do? Some large brokerages these days carry disclosures on whether they own a particular stock, if they are recommending it. These reports also point out whether a sister firm of the stock brokerage has an investment banking relationship with the company. This is something that retail investors should look out for.

"For retail investors, the only way out is to check the past track record of the brokerage house and then decide whether to trust the reports or not," says Ranjan of Way2Wealth.

So, investors should thus be careful and do their own homework on the stock, rather than buy or sell because of an analyst recommendation. As Zacks says, "One of the biggest and most correctable mistakes you can make using analyst recommendations is to allow the recommendations as a means by which brokers can sell you a stock. You may not fully realise that the more you trade, the more money your brokerage firm makes."

 

Curtesy: ET

Afraid of inflation? Inflation-indexed bonds may bring respite

Inflation scares no one more than those living on interest income. The news that food inflation is hovering above 18% must be giving them sleepless nights. The trouble is that though interest rates have risen marginally lately, they are nowhere near the actual rate of inflation. Worse, the inflation number that is bandied about is mostly based on wholesale prices. If you actually include the consumer price-based inflation (considering we don't buy things from the wholesale market), things would indeed look unpleasant.


That is why we are all ears when there is talk about inflation-indexed bonds (IIBs). The Reserve Bank of India (RBI) has published a discussion paper on IIBs in December to obtain views from the public and market participants on the product.


Why are these bonds such good news?


Unlike your regular FD or bond, the principal is indexed (or adjusted) to the inflation periodically and the interest is paid on this inflation-adjusted principal. Simply put, your investment is hedged against rising inflation.


Also, the implications of having IIBs in place are much bigger. If these bonds really hit the market, one may soon have a host of products such as inflation-indexed pension plans, inflation-indexed insurance and mutual funds that may allow one to protect capital from the evils of inflation.

Still not clear? See the illustration: The government issues a 10-year bond with 3% interest to be paid semi-annually on 1 January 2011. Suppose you invest Rs 10,000. The first interest payout will happen on 1 July 2011, since interest is paid semi-annual. During this period, if the inflation is 5%, the inflation-adjusted principal on 1 July 2011 would stand at Rs 10,500 (10,000+10,000X5/100). Hence, the semi-annual interest payment (or real yield) for the bonds would be Rs 157.5 (10,500 x 1.5/100). Alternatively, if you have invested in a regular bond with the same interest rate, you would have got only Rs 150 (10,000 x 1.5/100). If inflation inches further, it would reflected in the principal invested in IIBs, but not in a plain bond.

Needless to say, that makes a huge difference to the return you make.


"Inflation-indexed bonds provide an option for portfolio diversification and would be particularly attractive to individuals with a low risk appetite. In a period of high and volatile inflation, they gain more currency," says Crisil's chief economist DK Joshi. The underlying inflation index reflects the true inflation in the economy for the bonds to work, says Joshi.


"Inflation-indexed bonds are definitely good for a set of investors looking for hedge against inflation. But I feel that acceptance of inflation-indexed bonds will take time," says Nandkumar Surti, chief investment officer, JP Morgan Asset Management. Experts like him think the long tenure of these bonds, lower coupon rate (or the rate of interest offered) and lack of awareness among retail investors may lead to the poor offtake of IIBs and in turn, may result in the government issuing these instruments infrequently.


According to experts, investors must be educated about the benefits of IIBs. For example, the coupon on these bonds is typically lower than that of fixed rate bonds as IIBs are aimed primarily at protecting investors from inflation.

However, as you get the interest payout based on the inflation-adjusted principal, your real returns may be higher than other fixed rate bond in higher inflationary times. The only time these bonds will fall out of favour is during deflation - when the principal can be eroded. That shouldn't worry us since we look far away from the deflationary scenario.


Experts also say IIBs can only become popular if they are pushed through retail investors. Also, they believe the tenure of these bonds shouldn't exceed five to 10 years as longer-tenure bonds are not favoured by retail investors, especially senior citizens. "There is no single preferred tenure for these bonds. The appetite for instruments with differing tenure will vary with the type of investor. I think the tenure should extend from medium (five) to long term (10-15) years to cater to diverse needs. I agree with RBI's proposition on this," says Joshi.


The US Treasury Inflation Protected Securities (TIPS) are issued for different maturities and denominations. As of now, you will have to wait to see what the central bank does eventually. The discussion paper says the banking regulator plans to issue IIBs in small lots and based on the experience, may consider expansion in the future.

Curtesy: ET 

 

Gratuity: Get Rs 10 lakh for not hopping jobs

Are you ruing your decision not to change jobs while your peers jumped more than two or three times to land fatter salaries? Don't worry, because patience is not only a virtue but can also be very rewarding in financial terms. If you have completed at least five years of service, you are eligible for a fat lump-sum payment in the form of gratuity when you are finally bidding farewell to a company. Your former colleagues, who changed every two or three years for lucrative new offers, will not be eligible for the same benefit.


Gratuity is one of the oldest employee-retention tool in the basket of HR managers. It used to be one of the three major retiral benefits along with Employees' Provident Fund and pension. The objective was to make it lucrative for an employee to stay in the company in the long term and reap benefits. But unlike the retention bonuses that companies now offer to select employees, gratuity used to be for all employees in a company.


However, gratuity has lost favour over the years because job-hopping has become a norm. "The average employee now changes jobs every 2-4 years," says Kris Lakshmikant, CEO and managing director of Bangalore-based HR firm Head Hunters India.

Besides, patience is in short supply in this era of instant gratification. "Youngsters today are more concerned with cash in hand than what comes to them after 10-20 years. They do not think of long-term benefits and give no significance to benefits such as gratuity," says Lakshmikant.


This can be a costly judgement error. Even with a small hike in your basic salary, your gratuity corpus can assume gigantic proportions over the long term. If someone starts his career at a basic salary of Rs 30,000 and gets a nominal 10% increment every year, his gratuity at the end of 20 years will be Rs 14.1 lakh (see graphic). However, the Payment of Gratuity Act , 1972, places a cap of Rs 10 lakh on the amount that a company has to pay as gratuity, although a company is free to give more if it wants to.


What's more, the tax exemption limit for gratuity has now been raised to Rs 10 lakh (see box), which makes this long-term benefit even more attractive. "You should consider the fact that a lump sum of up to Rs 10 lakh you get is tax-free while the raise in your next salary would be taxable. So when you decide to change jobs and there are only a few months left for entitlement of the gratuity, buy some more time from the new employer so that you are able to avail this benefit," says Veer Sardesai, a Pune-based certified financial planner.


Governed by the Payment of Gratuity Act, 1972, gratuity is a defined benefit plan. It is mandatory for companies with more than 10 employees on their payrolls to give gratuity to an employee on resignation, retirement and termination of service.


However, an employee is eligible for this benefit only on completion of five years of continuous service with the company. Say, you leave after working for three years and rejoin after sometime and work for another two years, you are not entitled to this benefit.

"There should not be any break by the employee from the date of joining to be eligible for the sum, though probation period, any leaves that you have availed and notice period served by you are not counted as breaks," says the HR head of a large corporate house.

But there are exceptions to this rule. The condition of minimum five years of service is relaxed in the case of death or permanent disablement of the employee.

Gratuity is calculated as 15 days' salary for each completed year of service. The salary includes your last drawn basic salary and dearness allowance but excludes all other allowances. For instance, if you have completed seven years of service and the last drawn monthly salary is Rs 45,000, you are entitled to a gratuity of Rs 1.8 lakh.

The gratuity rules are lenient when it comes to calculating the completed years of service. If one has put in more than six months during a year, it shall be treated as one complete year.

However, the rules are not so lenient for employees who do not fall within the ambit of the Gratuity Act. Their entitlement is based on the average salary of half a month for each completed years of service. Also, any period of more than six months is not considered to be a complete year here. However, if an employer wishes, you can be paid more than the entitlement. Typically, employers manage this liability by creating a trust or outsource this money into the group gratuity scheme of an insurance company.

It's important to note that this benefit is only for those on the company's regular payroll. If you are on a contract, there's no gratuity waiting for you even after 5-10 years of service. However, some organisations do offer employees who are on the payroll of a company but have been hired on contract full benefits if the contract is renewed and they complete the stipulated time frame. Ask your company for details if you are on a contract.

Of late, the gratuity component has found its way into the cost-to-company compensation packages of companies. Some companies offer gratuity to employees even though they may not have put in the required number of years.

Delhi-based telecom engineer Yogendera Kumar was in for a pleasant surprise when he recently switched jobs. "I got gratuity along with my final settlement. Though I had been told that I would be eligible for gratuity, I wasn't sure since the previous two organisations where I worked for a similar tenure didn't pay me any."

For companies, this is a good HR practice that makes them look like a great place to work in. This is especially important at a time when India Inc is struggling to find the right talent. Says an HR professional with a Gurgaon-based telecom company: "We have included the annualised cost of the gratuity in the package, so we pay that up regardless of employee serving us for five years or not."

 

Curtesy: ET