Due Diligence. Should you accept a golden handshake?

In two minds whether to sign up for the voluntary retirement scheme (VRS) announced by your employer? The ‘golden handshake’ sum looks good and your heart is not really in the job.

But then, you worry whether the money that you get will take you far. And the voice in at the back of your head asks what you will do with your time when there’s no work to go to everyday.

So, it’s not easy to bid adieu to your job. Here are some pointers to help you decide.

Don’t get carried away by the big numbers. Your parting package may look very tidy on paper, but the taxman must be paid his share. Up to ₹5 lakh of your VRS compensation is exempt from tax if you are at least 40 years old or have completed 10 years of service. The remaining amount attracts the scissor.

Here’s an example. Say your VRS compensation is ₹30 lakh. Tax at 30.9 per cent (including cess) is applicable on ₹25 lakh; that’s ₹7.7 lakh. So, what you will actually get in hand is about ₹22.3 lakh. Before you argue that you’re in a lower tax bracket, remember that a big VRS lumpsum could put you in the highest tax slab of 30 per cent for that year.

Next, separate your VRS package and other entitlements, such as provident fund, gratuity and leave encashment. The VRS compensation is what you get for agreeing to leave early. The other benefits accumulated over the years are anyway payable to you whether you opt for the VRS, choose to resign, or continue in the job and retire later.

Continuing the above example, in addition to your ₹30 lakh VRS compensation, say other retirement entitlements amount to ₹40 lakh. Your employer shows the package as ₹70 lakh.

But you should base your decision only on the VRS sum of ₹30 lakh (₹22.3 lakh on a post-tax basis) and not on the entire package of ₹70 lakh. The ₹40 lakh is part of your earned corpus, ideally to be put to use once you hit the normal retirement age.

Now, weigh what you get from the VRS package against what you forego in future salaries and benefits. Employers look for cost savings through VRS.

So, the money offered to leave early is likely to be lower than what you would have earned otherwise had you worked up to the normal retirement age. Future earnings will have lower value than today due to inflation.

So, assume a 7 per cent inflation rate and work out the present value of your estimated future take-home salaries. Factor in benefits such as medical facilities and subsidised food provided by the employer. Use Excel or online financial calculators to arrive at this sum. Compare this figure with the post-tax VRS amount. If the gap is sizeable, it indicates that the compensation you get for leaving early will not last long enough.

Say, you are 50 and have 10 years to retire. You earn ₹10 lakh annually with a 5 per cent yearly raise. The present value of your future salary until 60 will be about ₹86 lakh (at 7 per cent annual inflation).

So, the VRS package of ₹30 lakh will cover just about three years of future salary and thus leaves a big gap of about ₹56 lakh. Here’s where it can get complicated. There will always be a gap between the VRS package and the future earnings potential in the job.

But whether this gap is reasonable or too wide depends on your financial position.

If you have adequate financial stability and resources shored up, you may accept the gap as a trade-off for a more relaxed life. A wide chasm though calls for caution — you may be better off continuing working, especially since longevity is on the rise.

This is particularly true for employees who are relatively young, in the 40-50 years age group. Opting for VRS may not be smart unless there is a solid back-up plan; you could, for instance, take up an alternative job at a comparable pay.

The VRS could let you have the best of both worlds. You get a lumpsum and a break from work, and then can get regular cash flows again.

Says S Srinivasan of Money Kare, Chennai-based wealth managers, “One should ensure that cash flows continue in the future. There should be stability of wealth.”

In any case, it’s good to be actively engaged even after taking VRS. Says CA Mukesh Dedhia, a Certified Financial Planner and Director of Ghalla & Bhansali Securities Pvt Ltd, VRS gives you a chance and unlimited scope to do something you always wanted to. He adds, “As long as your knowledge and skill sets are relevant, it is better to remain occupied and earn money.”