Understanding Your Payslip

My friend has finished engineering and joined a company as a software developer a few weeks back. She had got her first salary and asked my help to understand her salary slip since she did n't have much idea about finance. I had faced the same situation when I started my first job and I thought if I share it as a blog post it will be useful for many people.

Here are the common components of salary slip in most companies:

Basic Salary - Basic salary is the fixed part of your compensation and it is fully taxable. It is the base criteria used for calculating many employee benefits like E.P.F and gratuity.
House Rent Allowance (HRA) - HRA is the amount paid by the company to meet your expenses for renting a house. Usually it is 50 percent of the basic salary. Certain percentage of HRA is exempted from tax if you produce rental receipts.
For HRA, least of the following will be exempted from tax:

• HRA received
• 50% of basic (40% for non-metros)
• Rent paid in excess of 10% of basic

Conveyance Allowance - Conveyance allowance is the money paid to meet your expenses for commuting to office.
In India, conveyance allowance up to 9600 per year (800 per month) is not taxable.
Medical reimbursement - Medical reimbursement is the amount paid to meet your medical expenses. Medical reimbursement for up to 15000 per year (1250 per month) is not taxable in India. You have to submit bills at the end of the financial year or per quarter according to your company policy to get tax exemption.
LTA (Leave Travel Allowance)- LTA is the allowance paid by the company when you travel with your family on vacation. The travel expenses are exempted from tax if you provide bills. It can be claimed only twice in a block of 4 years.
Other Allowance or Flexible Allowance - Any other allowance that is not part of the above allowances. Some companies include medical and LTA also as part of the other allowance.

Here are the common deductions:
E.P.F - If your company is providing E.P.F benefit, 12 percent of basic salary is deducted as E.P.F contribution. It may not be applicable for many small companies where employee strength is less.
For more information about E.P.F, see my blog post Understanding EPF
Professional tax - Professional tax is the tax levied by state governments and the maximum limit is 2500 per year (208 per month)
Income tax - Income tax will be deducted according to the salary you are getting and it is levied by central government. it varies according to the Income tax slabs government fixes for each financial year.
Income in rupees and tax slabs for the financial year 2013-2014 for general tax payers and woman:

1. 0 to 2,00,000 - No tax
2. 2,00,001 to 5,00,000 - 10%
3. 5,00,001 to 10,00,000 - 20%
4. Above 10,00,000 - 30%

Your take home salary will be the sum of all this components less deductions. Suppose your annual package is 3,00000 per year.
You may think you will get 3,00000/12 = 25000 as your monthly take home salary. But in reality, your take home monthly salary will be your basic salary + HRA + conveyance allowance + medical+ L.T.A (If applicable)- deductions(Income tax + EPF+ Professional tax)

List of SBI branches with PPF facility in Bangalore

If you are in Bangalore the following SBI branches support Public Provident Fund (PPF) facility as per my knowledge. (It is not a comprehensive list and I will update it whenever I receive more information)

• SBI Koramangala
• SBI Hulimavu
• SBI Bannerghatta road
• SBI HAL
• SBI Richard town
• SBI Indira Nagar
• SBI Sarjapura Road
• SBI Belandur
• SBI Banashankari 2 stage
• SBI ITPL
• SBI Kempa Gowda Road, Bangalore Main Branch
• SBI Basaveshwarnagar
• SBI Cantonement, St Marks Road
• SBI Sanjay Nagar
• SBI Jeevan Bheema Nagar
• SBI Hegde Nagar
• SBI BTM (Mico Layout)
• SBI NAL Branch
• SBI JP Nagar Branch

For more information about how to open a PPF account with SBI, see my blog post :

http://sreejithsblog.blogspot.in/2012/07/how-to-open-ppf-account-with-sbi.html

Things you should know before buying Gold Jewellery

I am not a fan of Gold and I consider wearing gold as a weird thing. I don't consider Gold more valuable than some other element like Iron in the periodic table, but we live in a country where gold traditionally plays a major role in every important event in your life. During my engagement, very reluctantly I bought a ring for me. I chose the smallest ring that one might have bought for engagement and my wife still complains about it :-). Again there may be numerous occasions where you have to buy gold for your sister, your nephew and so on even if you don't like.

Since I had been to jewellery shops a couple of times to buy gold now, I learned a few things about purchasing Gold.

Here are some of the points I learned:

What is Karat? Why do the jewellers mention 22 Karat ?

24 Karat is pure gold, but it is too soft and ornaments made out of it may not last longer. In India what we get from jewellery is usually 22 Karat Gold. That means it contains a certain percentage of other metals like Cadmium and Copper. 22 Karat means it contains (22/24) * 100 = 91.6 percentage Gold and remaining percentage contains other metals. That is why it is known as 916 Gold.

Suppose it is 21 Karat Gold, then it contains 21/24 *100 =87.5 percentage Gold. So to get more value, make sure that you are buying 22 Karat Gold.

What is BIS certification?

To ensure the purity of Gold and to prevent fraud, hallmarking Scheme was launched by Bureau of Indian Standards (BIS). The BIS certified jewellers can get their jewellery hallmarked from any of the BIS recognized assaying and hallmarking Center.
For example 916 hallmark from BIS ensures that it contains 91.6 percentage Gold or 22 Karat.
For more information see:

http://www.bis.org.in/cert/hallbiscert.htm

How do Jewellers Calculate Price of Gold ?
Jewellery price include the following:
1. Price of gold as per market rate for the day * number of grams of gold
2. Making charges
3. Wastage charges
4. VAT
Suppose you are buying jewellery worth 8gm gold and the market price for gold is 20000 for 8gms.
The price of jewellery= 20000+ making charges+ wastage charges+ VAT

What are Wastage Charges?

Jewellers claim that a certain percentage of Gold is lost when you make ornaments from Gold. I don't buy this argument since you are using machinery to make jewels these days and also even if there is a Goldsmith I heard that the Goldsmith can recover a substantial percentage of Gold wasted while manufacturing. Even if Gold is wasted, it may be minimal.

Unfortunately we have to pay for this wastage charge since there is no norm from government about it.The wastage charges vary from jewellery to jewellery and it is between 8 to 20 percent. It is where the jewellers make huge profit. If they are charging more than 10-12 percent you should negotiate to reduce the price. It may be possible to get it reduced by 2-3 percentages if you are making bulk purchases.

What are Making Charges?

Making charges are the cost involved in making jewellery from pure gold. It includes the price of additional metals and labor charges of the goldsmith. Most jewellers will club making charge and wastage charge together and name it as value addition charge. Some may charge it separately. Here also you can negotiate to reduce the price.

What is VAT ?

Value Added Tax(VAT) is a tax on the final consumption of goods or services and is ultimately borne by the consumer.It is usually charged at 1 percent for precious metals like Gold.

Some Important Points to Keep in Mind:

Jewellery is just another business- Don't go to a jewellery shop with the mindset that you are entering a temple. Ask the price of every item in detail like making charge and wastage charge. If you are a regular visitor or purchase in larger quantity negotiate on making charge and wastage charge. The better you negotiate the more benefit you will get. I had my own experience when my relative negotiated in a jewellery shop they said you are the first guy who negotiates in a jewellery shop like you are going to a vegetable market and they tried everything to make him feel ashamed. But he insisted and finally he succeeded to get a reduced price :-)

Buy gold only from reputed jewellers or jewellers you trust- All jewelers may not be selling 22 Karat Gold while charging you the price for 22 Karat Gold. Ensure that the 916 hallmark is present in each item you buy.

Check the market price and find out the making charges before you go to a jewellery shop - It is better to check that days market price before you go to a jewellery shop. It would be good if you can find out about the making charges also.

Understanding EPF

What is EPF ?

Most of us who are working in the private sector may have heard about EPF. The answer most of the time comes to our mind is "Oh that thing, every month some amount of money is deducted from my salary, that is EPF right? ". Even if you have some idea about it let us explore it in a little bit detail. EPF or (Employee Provident Fund) is a retirement fund created under Employee's provident Fund act 1952 to help employees to generate some kind of savings when they retire. Every month 12 percent of your basic salary is deducted from your salary and kept it in a PF account and it is maintained by the Employees Provident Fund Oraganization (EPFO). Your employer also needs to contribute the same amount to the PF account. Government gives you an interest ( currently 8.5 percent) for keeping the money in PF account.

So things are simple right? Not so simple. In reality, out of 12 percent of your employer contribution, minimum of 8.33 percent or 541 which ever is lesser will go to a pension account known as Employee Pension Scheme (EPS). The interest rates for EPF and EPS are calculated separately on annually compound basis.


How to check my PF balance online ?

You can check your EPF account balance at the following link:
http://epfoservices.in/epfo/member_balance/member_balance_office_select.php

You need to provide your PF office location, PF number, your name, and mobile number to get the EPF balance information.


I heard that my company has a separate PF trust and I wonder what it is ?

It is called an exempted PF trust. Some companies are allowed by the government to form their own PF trust after getting approval from EPFO provided they satisfy some terms and conditions. They have to provide the same rate of return given by EPFO.


I have changed my job and I wanted to tranfer my EPF to my new company. How can I do that? What should I do to transfer EPS ?

To transfer EPF you need to submit the filled up form 13 to your new employer and they will forward it to the Regional Provident Fund office. As per my knowledge, once you transfer the PF amount the EPS will be automatically taken care of.
You can download form 13 from the EPFO website:


http://www.epfindia.gov.in/forms/13revised.PDF


My PF transfer is not happening even after several months, what to do now ?

Welcome to common man's India. That is the way India bureaucracy works most of the time. Fortunately we have RTI now and for most people it worked wonders.

Here is an excellent post by Manish on how to file an RTI for EPF transfer or withdrawal:


http://www.jagoinvestor.com/2012/03/rti-for-epf-withdrawal-or-transfer.html

Can I take a loan from EPF ?

Answer is yes. You can take a loan from EPF for the following purposes:

1. Purchase of a plot for constructing a house
2. Purchasing a home/flat
2. Home Improvement
4. Marriage of children, self, daughter, sister
5. Repaying home loan
6. Loss of Job
7. Higher education of children
8. Purchasing equipment for physically disabled family member

To take a loan, you need to submit form 31 and also submit the required supporting documents.

http://www.epfindia.gov.in/forms/FORMS_Latest/Form31.PDF


Can I increase my contribution to EPF ?

Yes you can increase your contribution to EPF voluntarily. But the companies contribution remains the same as 12 percent.

How to open a PPF account with SBI

If you are a salaried employee,  Public Provident Fund (PPF)  is one of the best debt instruments available for investment in India and it is tax free. You can open the PPF account in selected branches of SBI, associate banks of SBI and ICICI bank.

I was aware about the benefits of opening a PPF account but many times I postponed it. Finally I decided to do it some how and opened an account last week.

 Here is the procedure for opening the PPF account.

Prerequisites:

• Two passport size photos
• original  address proof  document and 2 copies
• original PAN card  and 2 copies.

Note: For address proof  Passport, Driving License or Voters ID will be sufficient.

1.  Go to a SBI branch that supports the facility to open a PPF account and get the PPF account opening forms(I have listed the SBI branch offices in Bangalore that supports PPF at the end of the post) . You need to fill up 2 forms. One for account opening and second one for the nomination (nomination form is not mandatory I guess) .You will also get a pay-in-slip for payment. Affix your photo on the account opening form. Witness signatures are required on the nomination form.
2.  Submit the forms to the bank official. Once you submt the filled up forms, a bank official will verify the copies with the originals and return the forms to you.  They will  direct you to the counter for opening the account.
3.  Submit the forms and document copies in the counter for opening account. You will be issued a PPF account number and forms will be returned to you with the account number.
4.  Remit your payment against it using the pay-in-slip for PPF account and collect the receipt from the cashier. Minimum amount you required  to open a PPF account is 500 rupees. 
5. Show the payment receipt to the counter for opening account  and  the bank official will issue a pass book like your normal SB account passbook and they will collect the forms from you and keep it in the bank.

PPF investments are eligible for tax deductions. To claim income deductions, you can take a copy of the PPF passbook for the transactions for the financial year and then submit it to the authorities.

Tips: Many people don't open a PPF thinking that it is painful to visit the bank each time when you have to make a payment. Be smart, times have changed. Now you can pay  online even if you don't have a SBI account. I don't have any SBI savings account but I am able to transfer money from my Citi bank account to PPF account by adding my PPF account as a payee in my account.

If you are still thinking about opening an account read this excellent post from Manish about why we should open a PPF account.
http://www.jagoinvestor.com/2009/08/why-to-open-ppf-account-even-if-you.html 

If you don't know about what is a PPF account, see this link : http://www.jagoinvestor.com/2008/04/providend-fund.html

If you are in Bangalore the following banks support PPF facility as per my knowledge. (It is not a comprehensive list and I will update it whenever I receive more information)

• SBI Koramangala
• SBI Hulimavu
• SBI Bannerghatta road
• SBI HAL
• SBI Richard town
• SBI Indira Nagar
• SBI Sarjapura Road
• SBI Belandur
• SBI Banashankari 2 stage
• SBI ITPL
• SBI Kempa Gowda Road, Bangalore Main Branch
• SBI Basaveshwarnagar
• SBI Cantonement, St Marks Road
• SBI Sanjay Nagar
• SBI Jeevan Bheema Nagar
• SBI Hegde Nagar
• SBI BTM (Mico Layout)
• SBI NAL Branch
• SBI JP Nagar Branch

Now you can also open PPF accounts with ICICI bank at selected branches.
In Bangalore ICICI M G Road branch offers PPF facility. For the complete list of ICICI bank branches that supports PPF facility see the following weblink:
http://www.icicibank.com/online-services/public-provident-fund/designated-branches.html

Things you should know before getting a home loan

At some point most of us try to go for a home loan to buy a home. I was going through the process for the last one and half months and I didn't know anything about it till I started. I learned a lot of things on the way and learned that it is not a smooth process as shown in the advertisements or claimed by banks. I thought about documenting the same so that it will be useful for people like me who never bothered about similar things through out their life.

In my case I bought an already constructed house at my home town, so the process may be slightly different for getting a loan for constructing a house.

The process starts once you finalize the property and make a sale agreement with the seller regarding the price of the property. Then you need to find a financial institution or bank who is willing to finance the loan. Check with 3-4 banks and then proceed. Check with your friends or relatives regarding their experiences with different banks and choose one convenient for you.

Some points to consider at this stage:

* You need a margin money of at least 20 percent of the property value . Bank
will finance only the rest. Some banks will give you a loan of up to 90 percent, but it is bank's discretion.


* Note that what ever be the agreement between you and the seller, bank will finance only the value you are going to mention in the title deed. Some banks will give you an option to give a portion of the loan as home improvement, but again it is bank's discretion.

* Check the different interest rates for the loan. There are two kinds of interests rates fixed and floating. You can't say one is better than the other as it depends on the current interest rates and variation that may happen in the future.

* Check the pre-payment penalty you have to pay if you pre-pay the loan. Some banks doesn't have pre-payment penalty if you repay after the initial 6 months.

* Ensure that you have a good credit history and provide correct information in the loan application form so that your loan won't get rejected.


Initially you may have to provide the following documents.

1. Completed application form with passport size photo
2. Copy of identity and address Proof
3. Salary slip for the last 3 months
4. Bank statement for the past 6 months
5. Copy of the latest Form 16
6. Copy of PAN card


Once you fill up and submit the application form the bank may ask for a processing fee depending on the loan amount.

You have to submit the following property documents or copies:

1. Copy of the title deed
2. Copies of prior title deeds .
3. Location sketch
5. Possession certificate
6. Encumbrance certificate for last 13 yrs
7. Latest land tax receipt
8. Agreement for sale
10.Building tax receipt
11.Approved plan


At this stage when you have submitted a few or all the documents, bank officials will visit the location to verify the property and do an assessment. The sanctioning of the loan amount also depends on this assessment.

Your will get a sanction letter from the bank after this process. Once they get a report regarding the assessment, bank will send the documents to a lawyer for verification. Depending on that bank may also ask for additional documents.

Once the verification process is complete, the bank will issue a cheque in the sellers name. You need to fix a date for the registration and let the bank know. Then the cheque will be handed over to the seller on the day of the registration. The new title deed will be prepared by the bank's lawyer and a lawyer or his representative will accompany you during the registration process. You have to pay for the stamp paper charges to the bank's lawyer in advance or you need to buy it directly and give it to the bank one or two days prior to the registration date.


You need to bear the following charges.

* Stamp paper charges.
* Lawyer's fees for document preparation
* Registration charges

Once you complete the registration bank will keep the documents but will give you a copy attested by a notary.

Lessons learned:

There is not much difference between time required to process a loan between a public sector bank and private bank other than you will get a warm welcome in a private bank and you will get a cold response from a public sector bank official. Initially you will feel that getting a loan from a private bank will be more easy, but finally they will also take the same time and require the same documents asked by the public sector bank. They may ask more documents than they mention the first time.

If you want to get it processed fast it is better to go through the loan agent in the bank than going directly. In my case, I realized that most of the time I ended up doing most things myself because I didn't go through an agent and many times I didn't get proper guidance.

Note: I don't claim to be an expert in details regarding a home loan. This post is based on my experiences while taking home loan. There may be variations in the process from bank to bank . Also the process may vary depending on the type of home you are buying.

Useful links:

4 home loan facts by Manish Chouhan
Loan EMI calculator from HDFC
tips while buying house by Manish Chouhan

Six Money Management Skills that Every Young Man or Woman Should Develop

In the ancient times money was just a concept that was a human invention to make human life better. Today whether we like it or not it dominates human life to a large extent.I was born in a village and money was never a priority for us and our icons were never the rich but people who lived a simple life of sacrifices.Making money was not considered as a great virtue and even though we may lack money some times, the neighbors or well wishers helped us and we returned the favor when there is a need for them. Decent education and health care were available from the government institutions at affordable prices and our needs were limited. But things changed up to a large extent even in villages in the last decade.

After completing my education when I started my work life in a big city, I realized how big the role of money in the life of an urban Indian. The system is corrupt to the core and from good education to health care, huge money is essential for a better life in any urban city and the government doesn't play much role in providing basic amenities to the urban population. Even though I don't want to compromise my principles for money or any materialistic thing,I realized I
should know the rules about money and learn to handle it well for a better life in the current urban India. After observing things for a few years, I found out that there are a few skills that we need to learn.

The way money works is not fair, same for life in general. We all may have seen it, nice guys most of the time finish last. Most of the time success with money or love is not achieved by people who deserve it, but by whom who know the rules and take actions accordingly.

I have identified the following skills that one need to develop if you want to handle money well:

1. Learn to negotiate - In the world of money you need to learn to negotiate.If you are from a family with strong values you were taught in the childhood that bargaining is bad and never put a price tag on you. It works only in the ideal world. In the real world, it is the other way. If you don't negotiate for your interests, you will end up as a loser be it in your career or your investments. Learn to negotiate with out compromising our principles and beliefs.

2. Conduct thorough research before you make an investment decision - Some of us do sufficient research before even making small purchase decisions, but we never do the same for investment decisions that affect us significantly and may require long term commitments. Never go by the words of financial advisers who sell financial products for their own benefits. I made the mistake 3-4 years back and paid heavily for it and to reduce my loss I still have to keep investing.
As a starting point read the book "What Your Financial Agent Will Tell You And Why You Shouldn't Listen" from Deepa Ragahavan

Learn and understand very well about each investment option and take your decisions wisely. Don't hesitate to ask questions about things you don't know and read the product brochures carefully before signing them. In the era of internet if you don't do research it is your laziness. Very few financial advisers really cares about your money other than worrying about his commission. Read sites like Jago investor, Yahoo columnist Deepak Shenoys blog , Moneycontrol or other informative sites regularly.

3.Learn as much as you can about finance and market - Keep an eye for detail and learn as much as possible about the terms we associate with money. For example learn about compound interest, systematic investment plan, various types of mutual funds, dividends, equities, ULIPs and so on. The simple rule that I have seen that work most of time is "buy assets when every one else is selling and sell when every one else is buying".


4. Learn about tax laws - I used to strongly believe that I need to pay all the taxes as a law abiding citizen of the country with out seeking much exceptions. But later I realized in the real world, it is the not the case. The best paid people in India pay taxes much less than many of us think. The reasons is Indian tax system has many loop holes and exceptions that either they or their well paid tax consultants know to use and we don't. When I first came to know about that I used to get angry, but if it is not against the law and not a breach of ethics there is nothing wrong in using it till the government take action and close those loop holes.

5.Learn to shop well - Quality is most of the time(at least in India) not related to price. Paying a lot for something doesn't mean you get the best. Always try to find out the best offers available in the market, speak to different vendors and compare the prices from 2-3 places before purchasing something.

6. Learn to keep your debts to none or minimum - Use your credit card wisely and understand the terms and conditions carefully. Don't take loans unnecessarily to purchase assets that depreciates in value in the long run, even though some loans like home loans are good in India to reduce tax burden.

These rules may be simple that many from urban families know well, but there may be a lot of people like me who doesn't know even this when I started working. I made all the 6 mistakes in the real life. Even though I said all these, I believe one should never equate money with happiness. Never compromise on your principles, your family and loved ones for the sake of money. In the long term, money cant buy you love or happiness in life.

Note: I don't claim to be an expert in financial matters and these are just observations based on my own experiences. It is up to you to take it or not.