1. Rupee Depreciation – How Does it Affect
YOU
By Banyan Financial Advisors On June 2, 2012 · 12 Comments
Number of View: 8814
It is all across the place – Rupee has touched all
time low. At the time of writing this article, Rupee is quoting at Rs. 56. Depending upon which
side of the fence you are sitting, you may either be laughing with extraordinary gains which you
may be making due to currency depreciation or weeping the hell out due to excessive losses
owing to it. There may be other category of people who would not be on either side of the fence
but sitting on the fence and are not aware of the impact of currency depreciation on their day-to-
day life and hence are not concerned with the currency movements. The objective of this article
is to unravel the impact of currency, specifically currency depreciation on the people from all
walks of life.
What does Currency Depreciation Mean ?
Before I even start harping upon the impact of Rupee depreciation, let me explain what does the
word depreciation mean in the context of currency. Technically speaking it means that Indian
currency is worth lesser now in comparison with some other currency. For India, this other
currency is primarily ‘US Dollars’. Lets have a look at the chart of how Indian Rupee has
behaved in comparison to US Dollars for past 10 years.

2. source – Yahoo Finance
One thing you may notice that in last 10 years Dollar was quoting as low as Rs. 39 in 2008 and is
now quoting Rs. 56 . What does it mean ? In order to buy 1 Dollar, we had to pay 39 rupees in
2008. Now in order to buy the same number of dollars, we have to shell out 56 Rs. per dollar (an
additional Rs. 17 per dollar). This reduction in the purchasing power of Rupee in terms of dollars
is called Depreciation of Rupee.
What Causes Rupee to Depreciate ?
This topic can be much better described in a complete book as the causes of depreciation of a
currency are multiple which in combination push and pull the respective currency’s quotation in
conjunction with other currency. A couple of the main reasons which are currently troubling
Rupee are as follows :
1. Demand Supply Rule – Rupee quotation follows the simple economic rule of Demand &
Supply. If there is more demand for dollars in India than the supply for it, Rupee would
depreciate and vice-versa. Demand of dollars may be created by Importers requiring more dollars
to pay for their imports, FIIs withdrawing their investments and taking the dollars outside India,
etc. On the other hand, supply is created by exporters bringing in more dollars from their
revenues, NRIs remitting more funds, FIIs bringing more dollar in India to spur their
investments.
2. Fiscal Deficit – How would others feel of your financial position if you earn Rs. 100,000 a
year, but end up spending Rs. 110,000 ? The excess of your expenditures over your total income
is called Fiscal Deficit. In order to bridge a Fiscal Deficit, you may end up taking a loan of Rs.
10,000. The more loan you take, the more riskier you would become in the eyes of lenders. This
is exactly the case in India. India is currently spending more than it earns via taxes resulting in a

3. mounting fiscal deficit. The major brunt of this spending is going into subsidies. With mounting
fiscal deficit, foreign investors start feeling uncomfortable and pull their money out of India
resulting in rupee depreciation.
2. Oil Prices – are another significant factor in putting pressure on the Rupee. Oil import
contributes as the biggest percentage of India’s import. By quantity, the oil demand is increasing
year on year. By prices, Oil is quoted in International Markets in US Dollars. Oil prices are
current over $100 a barrel and have significantly jumped up from sub $40 levels in 2002. With
the increasing price of Oil in international markets, India has to pay an increased amount of
dollars to import the same quantity of oil. Further more, with an increase in the quantity of oil
imported into India, a further pressure is imposed on the demand of dollars to pay to our
suppliers from whom we import Oil. This increase in demand for dollars depreciates the Rupee
further.
3. Weaker Capital Markets – If the capital markets (share markets) are on a boom, there is a
continuous flow of dollars into India which adds to the overall supply of dollars in the country.
Unfortunately, the current situation is opposite. Capital markets are at status-quo for a couple of
years and hence not influencing the supply side of dollars in the country. All in all – weaker
supply and excessive demand is resulting in sharp depreciation of Rupee
4. Speculators – Once a trend is set, speculators tend to punt against the rupee adding further to
the bearish tone of Rupee.
Effects of Rupee Depreciation
In the globalised world where we are living today, we are no longer shielded from the global
economics and product prices. Economies have started taking advantage of countries which are
producing specialised products at a cheaper rate and instead of producing them locally, they have

4. started importing them. Economies which have competitive advantage in producing a product at
a cheaper price have become exporters, hence opening up the global trade – exports & imports.
With opening economies, currency exchange rates have started playing an important role in the
cost of imports or competitive advantage in exports.
Lets start on a positive note detailing upon some of the good effects of rupee depreciation in
India.
Benefits of Rupee Depreciation
1. For Exporters
Exporters are perhaps the biggest beneficiaries of the Rupee depreciation as every dollar of their
sale fetches them more Rupees. Hence if they don’t reduce their prices, with the same quantity of
sales, they earn more in terms of Indian Rupees.
If they intend to capture market share, depreciating rupee gives them an opportunity to reduce
the price of their products in dollar terms and still making the same amount of profits in Rupee
terms. This makes their products more competitive in international markets and helps in selling
more volume of products due to cheaper prices in dollar terms. For example, the cost of
producing a product is Rs. 5000. When the Dollar was quoting 45 Rs., the dollar cost of
producing this item was $111. The exporter wanted to make 50% margin and hence he priced his
products at $166 or Rs. 7666 (at 45 level). At this level he is making a margin of Rs. 2666. When
Dollar is now quoting at 56 Rs, the exporter is now getting Rs. 9296 for the same product which
is priced at $166. If the exporter wants, he can now reduce his product prices in international
markets to $136 without loosing his margin of Rs. 2666. With the reduced product prices, he
would become more competitive in international markets and gain more customers / buyers.
2. NRIs become richer
Believe it or not, where ever NRIs are, most of them count their net worth in Rupee terms and
find depreciating Rupee to their advantage. For example, a NRI earning 100,000 dollars, when
converts his earning in Indian Rupees would be earning equivalent of Rs. 56,00,000 (when USD
is Rs. 56) compared to Rs. 45,00,000 (when USD was Rs. 46). This adds additional Rs.
11,00,000 to their kitty due to currency movements. Depreciating Rupee hence gives NRIs a big
incentive to remit more funds into India for investment purposes, adding to India’s forex
reserves.
3. Tourism industry
With a depreciating rupee, holidays in India become cheaper. Take for example, a holiday
package in Kerela backwaters costs around Rs. 200,000 for 10 days stay. When Dollar was

5. quoting Rs. 45, this holiday would cost around $4400. With Dollar quoting at Rs. 56, the same
holiday package would cost $3500, a whopping $900 cheaper ! This promotes foreigners to visit
India as India becomes an attractive Tourism spot owing to its financial competitiveness.
Negative Effects of Depreciating Rupee
The cons of a depreciating Rupee are perhaps more than its advantages and hence the
government and RBI tends to focus their policies and energies to control the excessive
fluctuations in the currency. To understand the aftermath of the current currency depreciation,
lets visit through the following points :
1. Expensive Imports
Quite opposite to exports, a depreciating Rupee would mean that every dollar which we have to
pay for our imports, costs more. For example, if we have to pay $100K for an import, it would
cost Rs. 45 lacs when dollar is at Rs. 45 and would cost Rs. 56 lacs when the dollar is Rs. 56.
Though it means that the imported commodity / product would become costly in India and any
product with elastic demand would result in lowering the demand for such imported products.
However, in case of India most of our imports are of products which are inelastic, e.g. Oil,
luxury products, etc. and hence despite of rising import prices, our imports don’t come down.
2. Oil Contagion
Oil prices in India are a subject of two factors - international crude oil prices and the currency
factor. A barrel of oil costing in International market at $100, would cost Rs. 4500 in India when
dollar is quoting at Rs. 45 and Rs. 5600 when dollar is quoting at Rs. 56. Hence even though oil
prices may decline 10% in International markets, currency depreciation may offset this decline
resulting in high oil prices in India.
As a result, high oil prices creeps into the prices of almost every commodity and product in the
economy. Oil plays a fundamental role in India’s economy as it supports the fundamental
structure of all Industries by fueling up the energy requirements. A higher oil price would result
in higher cost of production and higher logistics / transportation costs.
3. Higher inflation
This paragraph gels in perfectly with the above points which stresses upon imports becoming
expensive with a depreciating Rupee. And a direct consequence of it, the inflation in the
economy shoots up ! Higher inflation results in commodities becoming more expensive.
Countries which import their essential commodities suffer more than countries who are major

6. exporters. Unfortunately, as mentioned in above paragraphs, India is a major importer of Oil
which tends to hit the cost structure of the economy and fueling the inflation scenario in the
economy.
4. Poor returns for FIIs
When it comes to FIIs, they need to report returns on their Indian portfolio in their local
currency. For example, FIIs from USA would need to convert their Indian portfolio in US Dollar
terms. Lets assume that a particular FII has a portfolio of Rs. 70 million in India. When they
value their portfolio in dollar terms (when dollar is at 45 Rs.), the value would be $1.55 million.
However, the same portfolio would be valued at $1.25 when dollar is at Rs. 56, shaving off a
neat $300K from their valuation owing to currency movements ! This at times triggers FIIs to
sell out of their holdings to prevent any further losses and exit from India resulting in large scale
withdrawal of funds from the country.
5. Repayment of Loans
A couple of years ago, the option of borrowing cheap money from overseas was the hottest and
the most fashionable financial option which every capable company was exploring. No one even
dreamed that a time may come that owing to Rupee depreciation, they may be messed up badly,
making their cost of borrowing much more expensive than what they could have borrowed
within India. Not that the interest rates on external borrowings went up, but the impact of
currency depreciation meant that the borrowing companies had to pay more Rupees to repay
their dollar denominated loan. This completely screwed up their financial computations, whereby
some companies even ended up defaulting on their loan payments.
6. Foreign Education
Believe it or not, there are more and more Indian students taking admission in foreign university.
However, foreign education doesn’t come cheap and on an average can cost over 40,000 dollars.
When dollar was at 45 levels, the same foreign education used to cost around Rs. 18 lacs. Now it
costs over Rs. 22.5 lacs. This is not a small difference for a student who has to take an education
loan to sponsor his / her education and then repay it with interest.
7. Foreign Holidays
This is last thing on my mind today. A holiday package to Swiss costing $3000 would increase
from around Rs. 1.4 lacs to Rs. 1.7 lacs per person. For a family of two, it adds over Rs. 60K to
the cost ! However, foreign holiday is a luxury which not many can afford and the ones who can
afford it, additional 60K perhaps may not be a big dent on their savings.

7. Conclusion
I hope this article would have highlighted the widespread impact of Rupee depreciation and how
it hits every one, either directly (such as NRIs) or indirectly (such as a person who is fueling up
his car’s fuel tank). At times controlling the Rupee depreciation is not within the hands of the
Reserve Bank of India and the government does need to intervene and take conscientious steps to
come up with policy reforms to control the currency movements. Hopefully the Rupee would
back trace its steps and come down to more comfortable range of 40s rather than the current
dangerous levels of 50s.
Auto companies hit by falling rupee; General
Motors, Toyota mull price hike
NEW DELHI: Hit by the depreciating rupee, auto companies, including General Motors India and Toyota Kirloskar
Motor, are mulling hike in prices to offset the rising cost of component imports.
"We import lots of parts and the rupee depreciation is impacting us. We were planning to review prices in January
but due to the currency fluctuation we may have to do it soon," General Motors India Vice-President P Balendran
told media.
He said commodity prices have also been increasing, adding to the burden on auto firms. "We are currently
evaluating the quantum of impact on the prices of our products," Balendran said.
Expressing similar views, Toyota Kirloskar Motor Deputy Managing Director (Marketing) Sandeep Singh said the
present currency fluctuation is affecting the company severely. "It is a double whammy for us. On one hand, yen is
appreciating, while on the other hand rupee is depreciating. Our margins are getting impacted," he added.
Asked if the company will increase the prices, Singh said: "As of now we are absorbing, but if there is too much
pressure, then we will share the burden with customers. "Currently, we are revisiting the prices of all our models.
Any new price increase, if we take, will be applicable from January 1."
The rupee plunged to an all-time low this morning to Rs 52.50 against the US dollar on the Interbank Foreign
Exchange on sustained demand for the American currency. It is putting severe pressure on companies which import
substantial amount of components from overseas.
"The rupee depreciation is adversely impacting us as we are a net importer. This is the worst movement of rupee
against US dollar. It has lost 15 per cent in the last two months," Maruti Suzuki India (MSI) Chief Financial Officer
Ajay Seth said.
MSI has both direct and indirect exposure to foreign currencies while importing components, and it imports about
Rs 8,000 crore worth of parts annually, he added. "At the same time, we also export cars and that is benefiting at
present. However, considering both, we are impacted as a net importer. The situation is affecting our margins," Seth
said. He, however, said the company does not have any plans at present to increase the prices of its products.

8. The hit due to the weakening of rupee comes at a time when auto makers have been enduring one of the toughest
periods with car sales in the country on a continuous decline.
In October, car sales in India registered their steepest monthly decline in nearly 11 years, tanking 23.77 per cent on
account of a huge drop in output by the country's largest car-maker MSI due to labour trouble, coupled with high
interest rates and rising fuel prices.
Another auto maker Honda Siel Cars India (HSCI) said it is not impacted so far as it is protected under long term
contracts with its foreign vendors.
"So far, we have not faced any impact due to depreciation of rupee as we have forward contracts for importing
components, and the ongoing volatility is very recent. If it remains like this, then there will be some impact on us in
the long run," HSCI Senior Vice President (Sales and Marketing) Jnaneswar Sen said.
He declined, however, to share for how long HSCI's imports are protected under forward contracts.
Volkswagen Group Sales India, Member of Board and Director, Neeraj Garg said: "There is pressure on us because
of the currency fluctuation. The quantum of impact has to be worked out as we have many import contents in our
models, except Polo and Vento."
Garg, however, said: "It is very difficult to pass on the burden to customers as the market has already slowed down.
We need to do a fine balancing act".
Commenting on the current situation, Society of India Automobile Manufacturers Director General Vishnu Mathur
said: "It is a complex situation. Those who are importing are paying higher cost, while those who are exporting are
getting higher revenue".
The companies who are not exporting products will have a higher impact due to import of CBUs, engines and other
critical components, he added.
When asked if the companies may hike the prices to mitigate the impact of Rupee depreciation, Mathur said: "I
really doubt if in today's market scenario, anyone will pass on the increase to the customers".
The country's second largest car maker Hyundai Motor India Ltd (HMIL) said its imports are getting affected, but
due to high level of exports, the company is less impacted currently. "Our imports are getting costlier, but we are
able to absorb the rising cost as we are a big exporter from India. So we have some cushion to the current adverse
situation," a spokesperson of HMIL said.
Fixed Deposits – How to Benefit the Most
Out of them.
By Banyan Financial Advisors On January 6, 2012 · 21 Comments
Number of View: 9233
You might think that an investment product as simple as a fixed deposit can not have any further
options to explain. The purpose of this blog note is to exactly point out how you can reap
maximum benefits from a fixed deposit by playing with its different options.

9. As you may know, fixed deposit simply means depositing your money for a fixed duration and in
return getting interest income as a compensation for parting away for your money for the
duration of the deposit. The main components for a fixed deposit are:
1. Principal amount – the amount which you deposit with the bank.
2. Compounding method used by the banks to provide interest payment. This is one of the least
known aspect of the fixed deposits.
3. Duration of the fixed deposit
4. Interest rate paid on the deposit
5. Penalty clause.
Let us counter each of the above mentioned components one by one and identify how to play
with them to maximise your returns.
Principal Amount
You return can not be increased by playing with this component of your FD. Simply, the more
you put in an FD, the more is the interest payment. However, if I give you an option of creating a
FD for Rs. 50 lacs, can you think in your mind and let me know how would you go ahead and do
it in a bank. Perhaps most of the investors would go to the bank and get a single FD of Rs. 50 lac
at the prevailing interest rate. However, did you ever think what would happen in case you
needed to withdraw 10 lacs from your FD in case of an emergency? The bank would liquidate
the entire FD by imposing a penalty rate of interest even though you need just a fraction of the
FD to be liquidated. To avoid such a situation, you may open you FDs in small denominations,
for example 10 FDs of Rs 5 lacs each. Another alternative can be to open several FDs of
different denominations. In our example you could alternatively open FDs of Rs. 1lac, 2 x Rs. 2
lacs, 2 x Rs. 5 lacs, 2 x Rs. 10 lacs and so on. The advantage of opening fixed deposits in such a
manner is : when ever you would need emergency funds, lets say Rs. 5 lacs, you can liquidate
just the required amount of FD and not the entire FD and hence not loosing upon the interest on
premature liquidation of entire FD.
Compounding Method of Interest Rates
This is one of the least known aspect around FDs. Generally banks would advertise only the
interest rate which they are offering on their fixed deposits. Interest rates offered on fixed
deposits can generally be compounded on a quarterly, half yearly or yearly basis. The type of
compounding has a material affect on the FD returns. Before giving an example let me explain

10. what compounding means. If you invest Rs. 1000 for 10 years at 10% interest rate, compounded
on a yearly basis, the interest schedule would look like the following:
Year Opening Interest Balance
1 1,000 100 1,100
2 1,100 110 1,210
3 1,210 121 1,331
4 1,331 133 1,464
5 1,464 146 1,611
6 1,611 161 1,772
7 1,772 177 1,949
8 1,949 195 2,144
9 2,144 214 2,358
10 2,358 236 2,594
Total 1,594
In the above example, the interest is paid on a yearly basis and added to the opening balance of
the FD for the year. In the next year, interest is paid on the opening balance + Interest paid on
previous year. This cycle keeps on happening every year. Hence you get interest paid on interest.
This is the principal of compounding. In this example, the total interest paid on a deposit of Rs.
1000 over 10 years is Rs. 1,594 on annual compounding basis. If the same deposit is booked at
the same interest rate and same duration, but with half yearly compounding basis, the interest
paid would be Rs. 1,653. And for quarterly compounding mode, the interest paid would be Rs.
1,685. Hence you may notice that if you have two different banks providing the same interest
rates but with different compounding method of interest payment, could result in different
interest payouts.
Duration of FD
Following upon from our earlier example, the larger duration a FD is booked for, the more are
the yields. In the above table, if we add interest yields, you may notice a sizeable difference in
interest yields, This is based upon the concept of power of compounding. The longer the duration
is, the more interest is paid on the interest of earlier years. Thus over 10 year period, a 10% FD
compounded annually would be 16%.
Year Opening Interest Balance Total Interest Return
1 1,000 100 1,100 100 10%
2 1,100 110 1,210 210 11%
3 1,210 121 1,331 331 11%
4 1,331 133 1,464 464 12%
5 1,464 146 1,611 611 12%
6 1,611 161 1,772 772 13%
7 1,772 177 1,949 949 14%

11. 8 1,949 195 2,144 1,144 14%
9 2,144 214 2,358 1,358 15%
10 2,358 236 2,594 1,594 16%
Total 1,594
Banks generally don’t prefer accepting deposits for long durations and hence it is a common
observations that they provide lesser interest rate for durations greater than 3-5 years. The
maximum interest rate is generally provided between 1-3 year period. Hence it makes maximum
sense that in times where the interest rates on their peak, a 10 year fixed deposit may be opened
with a bank, irrespective of the fact that the same bank would be offering a much higher rate for
3-5 years fixed deposit duration. The rationale behind this is that you would be able block your
funds at an excellent interest rate for a longer duration. If you open a deposit for a smaller
duration, once the fixed deposit is matured, you would have no option than to go with an interest
rate prevailing on maturity and probably the interest rate on maturity would be lower than what
you would have opened your initial fixed deposit for.
Loan against FDs
At times you may require some emergency funds and it is quite probable that you may want to
liquidate your Fixed deposit to address your urgent demands. Alternatively, you can go ahead
and take a loan against your FDs for your short term funding requirements. Generally the same
bank would provide you a short term loan at around 2-3% rate higher than the rate of FD. Once
your requirement is met, you can pay back the loan. This would prevent you to unlock your FD
and loose upon the compounding interest rate or an excellent interest rate which you may have
locked a couple of years back. And the cost is generally 2-3% only for you to get this flexibility.
Penalty Clause
Though the term fixed deposit means a deposit for a fixed duration, you can prematurely
terminate a deposit by paying a early termination charge. This penalty charge is based upon the
duration the FD has been in place and the prevalent rate for that duration on the date of
termination. After that the bank deducts a % penalty charge to arrive at the final amount. For
example, if you placed a fixed deposit for Rs. 1000 with a bank for 5 years at a rate of 9% p.a on
1 January 2011. You go to the bank on 30 June 2011 (after 6 months) to liquidate the FD. The
bank would identify what would be the interest rate for the fixed deposit if it was booked for a 6
months duration on 30 June 2011. Lets say that the rate of interest for 6 months on 30 June 2011
is 5.5%. The bank would then deduce a small % charge which is generally 1% from 5.5% and
provide you interest at 4.5% on your FD for 6 months.

12. Provident Fund (PF) – Best Investment
Option Available for Salaried Employee !
By Banyan Financial Advisors On January 29, 2012 · 54 Comments
Number of View: 12248
It is hard to find a salaried person who would not be aware about the monthly deductions being
made from their payslips towards the Provident Fund (PF) contributions. Though being made
every month and month on month, not all people are aware of what are the benefits of PF and the
associated regulations. The purpose of this article is to appraise th
em of these minor but important aspects of PF and how to make the best out of this investment
instrument.
Provident Fund is a long term or rather the one of the best and safest retirement solutions
available for a salaried employee in India. Generally an employer having more than 20
employees is required by law to operate Provident Fund scheme. The employer pays 12% of the
monthly emoluments of an employee as an employer contribution into a provident fund account
opened with Employees Provident Fund (EPF) India. Similarly, the employee is also required to
pay an equal 12% of their monthly pay into the EPF account
. This amount is deducted from the salary before crediting it into the employee’s bank account.
You can consider it operationally similar to the monthly TDS deducted by the employer.
Employees also have an option to get additional funds deducted from their salary and invested
into their PF account by providing their employer a written request.
Where is the fund invested ?

13. When we wrote the word ‘Safest’ in the start of the blog, then we really meant that PF is one
THE SAFEST investment channels available for a salaried employee. Provident fund accounts
are provided a fixed interest at a rate fixed by the government on an annual basis. Due to the
political sensitivity, this rate is generally fixed higher than the prevailing market interest
rate. Interest is credited to the account on a monthly basis. You may feel surprised, but the
interest rate in 1999 used to be as high as 12%. In early 2000 this rate was around 10.5% and it
got reduced gradually to around 8.5% by 2009. Currently since 2011 this rate is fixed at 9.5%. A
tax free 9.5% rate equates to around 13.5% taxable interest income.
How much PF deducted ?
Broadly, an employer has to pay 12% of an employee’s (Basic plus Dearness Allowance) on a
monthly basis as PF contribution. Further an employee also has to contribute the same amount on
a monthly basis. For example, if an employees monthly salary is Basic Rs. 15,000 and Dearness
allowance Rs. 5000 totalling to Rs. 20,000 per month (Gross salary). The employer shall pay
12% of Basic+DA or 12% of Rs. 20,000 (Rs. 2400) as their monthly contribution to the PF
account of the respective employee. Similarly, the employee shall also contribute an equal
amount, i.e. Rs. 2,400 towards their PF contribution. Employee’s PF contribution is deducted
from the gross salary before providing the net cash salary to the employee. You invest Rs. 2,400
and your employer would be investing Rs. 2,400 as well or in other words, your Rs. 2,400
investment toward PF becomes Rs. 4,800 on day 0. Doesn’t it sound too good to be true ?
Doesn’t it sound a bit harsh towards the employee – possibly not..
Cost to Company or CTC
Most private sector companies have introduced a term ‘CTC’ or Cost to Company. In other
words, the companies while hiring an employee declare the total package as CTC instead of
gross package. Employer’s contribution towards PF is added to the gross salary and reflected as
CTC. For example, if your gross yearly basic salary is Rs. 500,000, the employer shall contribute
Rs. 60,000 per year towards your PF. The company shall publish you total yearly emoluments as
Rs. 5,60,000 as CTC as it is the total cost which the company is bearing towards the
employment.
Tax liability
There is not one but multiple tax aspects associated with PF. Some of these are mentioned below
:

14. 1. The most important tax benefit of PF is that both the employer contribution, your PF
contribution and associated interest on PF balances is tax free at the time of withdrawing of PF.
However this would be tax free only if the withdrawal from PF is on the following grounds :
On the death of employee.
On permanent disability of employee.
In case the business of the employer is disrupted.
On the completion of 5 years service of continuous service of the employee. As this
condition is most common, it requires a bit elaboration. 5 years of continuous service
does not mean that it should be from one employer only. For example, if you have
worked for 3 years in Company A and left the employment to join Company B and
worked there for another 2 years. Both of these services would be clubbed together to
identify if you have been in service for 5 years. If you left Company A & didn’t work for
some time and then joined Company B, then your service in Company A would not be
clubbed for the purpose of computing 5 years of continuous service.
2. Even if you are eligible to be taxed (as you did not meet the conditions specified in point 1
above, only Employer’s contribution to your PF and interest accrued on your PF balances (both
Employer and Employee contribution) shall be taxed. In other words, Employee’s contribution
shall not be taxed.
3. As per the current laws, your (employee) contribution towards PF is eligible for tax rebate
under section 80C of Income tax act upto Rs. 100,000 per year. However, this may change in the
coming new Direct Tax Code (Income Tax Act).
Voluntary Contribution
Owing to the above benefits, many employees often go ahead with contributing more than the
minimum statutory requirement of 12% of the Basic+DA amount. The maximum amount which
an employee can contribute is upto 100% of the Basic part of the salary. The extra contribution,
generally called as Voluntary contribution is also eligible for the same interest rate earned by the
PF account and is also tax free. You need to contact the HR department of your company to
request for increasing your minimum contribution towards PF by filling up a form. Some
companies put in restrictions that an employees can increase or reduce their voluntary
contributions only during specific times in year such as yearly, half yearly or quarterly. You
must be aware that while this extra voluntary contribution is one of the best investment options,
it would result in reducing your take home net cash salary.
Dormant PF account
This is the most common ways by which even after contributing to your PF account you can
loose upon a material amount of interest. If you do not contribute to your PF account for more

15. than 3 years, your PF account becomes inactive and will not be provided interest.This rule has
been implemented from 1 April 2011. You may be wondering that if you are working as an
employee in India, then it is mandatory for you to contribute to your PF. Hence till you are
working, you would be contributing to your PF and hence your PF account should not become
dormant. However, this is valid only for your current PF account – the one into which your
current employer & you are contributing into. If you have other PF account from previous
employers, you will not be contributing to those PF accounts. Unless you transfer those PF
accounts into your current PF account, all except your current PF account will become dormant
after 36 months from the date of last contribution. Hence it is VERY IMPORTANT THAT YOU
TRANSFER YOUR PREVIOUS PF BALANCES TO YOUR CURRENT PF ACCOUNT. This
would prevent your previous PF accounts from becoming inactive as well make
them administratively efficient to be managed.
Transfer of PF Balances
Not every person is in the same job upto his / her retirement. It may still be true for public /
goverment sector jobs, but in other cases people keep on changing jobs in private sector after
every few years. When you join a new employer, they open a new PF account and deposit your
contributions to the new account. However, you may be surprised that not many people think
about consolidating their PF balances and their PF balances may be scattered across multiple PF
accounts. I even know a couple of people who have over 20 PF accounts and they have even lost
track of their exact PF details. So what is the best solution out here ? Once you leave your job,
you should transfer the PF balances from your previous employer to your new employer’s PF
account. This would ensure that your PF balances are consolidated in one account. Also as
mentioned in the earlier paragraph, it would prevent your previous PF account from getting into
an inactive state. It is simply like transferring funds from your one bank account to another and
closing previous bank accounts. This kind of transfer generally takes around 30 days and can be
initiated after 2 months of leaving your previous employer. Form 13 is generally used to transfer
PF balances (Form 13 – PF Transfer).
Should You Encash Your PF Balances ?
This is a very tempting question which may end up releasing your past PF contributions to your
bank account ! In many cases this amount can be in several lakhs and hence it becomes even
more tempting to milk your PF account to fund your current liabilities / investment decisions.
How often I have come across people who have encashed their entire PF balances to fund their
car purchase, paying the deposit for their property, children education, foreign holidays or
furnishing their houses. But have you thought about how much danger you are putting your
future into by encashing your PF balances. Some points which are worth a consideration are:
PF balances grow based upon the power of compounding. We have explained the
principle of compounding on a seperate blog Fixed Deposits – How to Benefit the Most

16. Out of them. If you encash your PF balances in earlier stages, you will not be able to take
advantage of compounding and hence would loose upon the opportunity to allow your
money to grow.
You might end up buying a house to live in using your PF balances – but did you ever
realise that the house which you live in is a biggest dead asset. Sorry if it sounds harsh –
but though that house would provide you shelter, but it won’t provide you a monthly
income – something which you would really need post retirement.
One of the comparisons which may assist you in deciding if you should really encash
your PF is the Gold / Jewellery asset which you may have for wife. Would you sell your
family gold / jewellery to acquire the investment or expend the funds for which you are
currently thinking about encashing your PF balance. Fortunately / unfortunately Indian
families consider wife’s jewellery as a central bank which is lender of the last resort. A
family’s jewellery is tapped only if there is nothing remaining in the family’s finances to
cater to the emergency spending requirement. If you still think that the requirement of the
situation is so grave that you must tap your PF balances, then go ahead.
Encashing your PF balance can have immense ramifications on your financial situations,
both from taxation and investment portfolio perspective. Hence you must consult your
financial advisor before taking this decision. If you don’t have one, please feel free to
contact us. Our contact details are mentioned on our Contact Us page
on www.banyanfa.com.
How to Encash
If you want to withdrawn your PF balance, then you need to fill Form 19 and submit with EPF
authorities. Updated form can be downloaded from
http://www.epfindia.com/downloads_forms.htm . Encashment request is taken after 2 months
from the date of leaving the service. The form has specific section where the applicant has to
mention the bank account where the funds are to be credited. Once the form is processed by EPF,
the proceeds are directly credited into the bank account of the appliant.
Employee’s Pension Scheme (EPS)
Another component of PF is EPS or Employee’s Pension Scheme, governed by Employee’s
Pension Scheme -1995. The benefits of EPS are as follows:
1. Provide pension for life to the scheme member after retirement.
2. If the member dies, pension is provided to the following family members:
o If the member was married, pension is provided to the widow / widower for life or
till remarriage;
o Additional pension provided for upto two children/orphan upto 25 years of age
along with pension provided to widow/widower;

17. o Children/orphan with total and permanent disability shall be entitled to payment
of children pension or orphan pension as the case may be irrespective of age and
number of children in the family;
o In case the member is not married, pension is paid to the nominee; and
o If there is no nominee and the member does not have any family, pension is paid
to dependent father/mother.
Eligibility of Pension under EPS
A member is eligible for pension upon completion of 10 years of service and attaining 58 years
of age. If the member choses to retire between 50 to 58 years of age, the pension shall be
provided by deducting 3% for each year less than 58 years. This condition does not apply if the
member dies before 58 years of age.
Do I have to pay anything to get Pension under EPS ?
Good news is that you don’t need to contribute any more than what is being deducted for PF i.e.
12% of your salary. EPS amount is deducted from Employer’s share of PF at the rate of 8.33% of
the Salary. For the purpose of computing the EPS contribution, maximum salary is maintained at
actual salary or Rs. 6,500 per month which ever is higher. For example, if your salary is Rs.
10,000 per month – the PF being paid by the employer shall be 12% of Rs. 10,000 = Rs. 1200
per month. Out of Rs. 1200, EPS amount shall be diverted from Employer’s contribution towards
EPS. To calculate the EPS amount, the monthly salary shall be considered at Rs. 6,500 (as Rs.
10,000 is greater than Rs. 6500). EPS amount in this case shall be Rs. 541 (8.33% of Rs. 6500).
This amount shall be deducted from your Employer’s contribution of Rs. 1200 and sent to EPS.
To clarify, nothing is diverted from Employee’s share towards EPS.