“The decision to opt for VRS depends on various factors, including the employee’s ability and willingness to keep working,” said Sanjeev Govila, a Sebi-registered investment adviser.
While opting for VRS looks like a good way to exit, it is essentially like retiring early. We tell you how to navigate the decision, what to expect afterwards and how to deploy your compensation to secure your financial future.
What do you get?
So what do you get when you opt for VRS? “In case of SBI, VRS payment equals 50% of the salary for the remaining period of employment subject to a maximum of 18 months of the last drawn salary,” said Tanwir Alam, founder and CEO, Fincart, a financial planning firm. So if you have five years of service left, and you draw ₹1 lakh a month, 50% of the remaining period will come to ₹30 lakh. But since it is going to be capped at only 18 months of the last-drawn salary, you will get just ₹18 lakh.
Other accrued benefits like gratuity, pension and provident fund are also paid out with the VRS compensation. Some companies have an overall post-retirement medical cover which applies even after you opt for VRS.
At SBI, the pension is decided on the basis of the income slab and designation at the time of retirement. By and large, VRS is offered to senior employees, so, typically, the designation remains the same till retirement.
However, the policies may vary from employer to employer, so it’s important to check the terms.
Evaluate the benefit
Even with a few years of service left, it is important to weigh the pros and cons of sacrificing your earning potential in favour of a lump sum payout.
Therefore, it is important to do the math. Factor in the salary and benefits you expect to receive in your remaining years of service, as well as income hikes and bonuses, and then compare it to the VRS payout.
Alam cites the SBI example to demonstrate who would benefit from it. “Assuming that a person is just 50 years old and has completed 25 years of service, he will be eligible for 10 years of pay. However, if he opts for VRS, his compensation will be capped at 18 months of the last salary drawn, so they will lose out. Hence, it is not viable for people who have more than three years of work life left at SBI,” he said.
Incomes usually reach a peak at the fag end of people’s careers, which makes calculating your benefit even more important.
Taxability: Take the tax aspect into consideration as well while calculating your benefit.
According to Section 10(10C) of the Income-tax Act, any compensation received under VRS is exempt from tax up to ₹5 lakh. “Receipts from a voluntary retirement scheme are tax free up to ₹5 lakh for a retiring employee, when they meet the conditions specified in the Act applicable to an approved VRS,” said Archit Gupta, founder and CEO, Cleartax. Beyond the ₹5 lakh limit, the amount is taxable.
Keep in mind is that the exemption can only be claimed in the assessment year in which you receive the compensation.
Plan your future
Given that life expectancy is on the rise, the income stream drying up could be a problem if you haven’t planned for the long term. This is simply because your retirement years will get extended and you will need to provide for that many more years.
The alternative is to look for employment after taking voluntary retirement. “In many cases, companies facing a financial crunch or further growth difficulties offer such schemes. In such cases, it makes sense to opt for VRS and look for better opportunities,” said Govila.
But in many cases, VRS comes with conditions like the employee can’t apply for another job in a sister concern of the company or in companies with the same management and promoters.
Another option is to start your own venture using the funds you receive. “If you decide to start your own business, you can use part of VRS funds as much-needed seed capital,” Govila added. But evaluate the risks of doing so.
Deploy the corpus
The VRS payout should be deployed in the same way you would invest your retirement corpus. “The money will not be required all at once, so it must be invested. It can be broken down into buckets for financial goals that are less than three years away; three to seven years away; seven to 10 years away; and more than 10 years away,” he said.
According to Govila, if you opt for VRS close to retirement, you would probably not get a full-time job again, so it is important to invest the lump sum to generate passive income. “A combination of fixed-income instruments, and debt and equity-oriented funds can be considered. It is always advisable to get a comprehensive financial plan,” said Govila.
Also, evaluate your post-retirement needs, and factor in your income from investments and other sources, he added. “Assuming that you need a monthly payout of ₹50,000 with inflation at 6% per year, and you have invested in debt and equity in a 50:50 ratio with returns at 12% and debt at 8%, respectively, you will need to accumulate around ₹1.75 crore if you intend to keep your corpus untouched and live off interest or capital appreciation used for a 30-year retirement period. If you intend to exhaust the corpus over this period, you need to accrue around ₹1.10 crore,” said Govila.
It’s also important to keep some other factors in mind. “Before opting for VRS, ensure you are debt-free. Have a financial plan that includes life insurance, health covers and an income and growth strategy. Also, have a life plan to make VRS worthwhile,” said Santosh Joseph, CEO and co-founder, Germinate Wealth Solutions LLP.
Weigh your options carefully before you opt for VRS.