Your Money. Tide over job loss fears, with a safety net

The fear of losing one’s job has always haunted executives, across the spectrum. Call it by any name — retrenchment, lay-off, pink slip – the perturbation it evokes is the same. The regularity and the scale of job losses today is so alarming that it calls for a specific, well-thought-out strategy to minimise the damage it inflicts on your finances.

The key to keep your finances balanced in troubled times is planning for the worst.

Build an emergency fund

Job loss is not permanent. This phase too shall pass sooner or later, but one needs to have a safety net for the interregnum between two jobs. “Learn to save for a rainy day is an age-old adage, the game changer on this is saving smartly and wisely. Build a contingency fund that you will not touch at all, unless it is an emergency. Build a corpus that you can access at any time,” says Saurav Basu, Head, Wealth Management, Tata Capital.

One can choose from an array of options to build a contingency fund. “You can park a fixed amount in a liquid fund or a fixed deposit. You can invest in multiple options, but ensure that you monitor your funds from time to time. A recurring deposit is also a very good option or go for a regular SIP in a liquid mutual fund,” says Basu.

Emergency funds are typically five-six months of expenses and these expenses should include the debt repayments due, advises Shreenivas Kunte, CFA, CIPM, Director of Continuing Education and Advocacy, CFA Institute, India.

It goes without saying that balancing expenses when you are between jobs requires a greater focus than ever before.

Tightening your purse strings does help. “Revising your budget is of utmost importance. Channelise as much fund as possible towards paying off your high-priority debts,” says IndiaLends Founder & CEO, Gaurav Chopra, who is also President of the Digital Lenders Association.

Big-ticket debt such as home loans may have provisions for a brief grace period, but unsecured personal loans and credit cards don’t show any leniency. “At one extreme, the debtor may even have to file for insolvency,” cautions Kunte, while stressing the significance of planning for debt repayment commitments.

Keep investments going

It is, however, imperative to keep investment plans such as SIPs and PPF going without a break. Not only that, discontinuation can deprive you of some real, long-term benefits, but revival can also attract a fee.

Anand Vardarajan, Business Head, Banking, Alternate Products & Product Strategy, Tata Asset Management Ltd, explains: “First, the market does not know that someone is between jobs. It has its own mind and waits for none. Not being in the best days in the market can change the outcome for investors meaningfully.”

One should be discretionary in expenses, but not in savings, adds Vardarajan. “In the unfortunate event of job loss or unstable income, the two choices one has are — reduce discretionary expenditure or discretionary savings (SIP). SIPs help create wealth over a period of time and stopping them may not be advisable. Discretionary expenditure gives immediate satisfaction, but would someone like to have it at the expense of their future?”

Stressing that “sequence is everything”, he says, “Rinse, wash, dry and iron is the correct sequence. If you do the reverse, you will have a very different outcome!”

Equally important is renewing your insurance plans, particularly medical cover, to avoid the unpleasant situation of having to pay huge bills when your regular income is reduced greatly.

Tax burden

Ironical as it may sound, it is a hard fact that your tax burden is not eased even if you are out of a job. One reason for this is the taxable nature of the severance package that comes with retrenchment. “A lumpsum severance pay received by an individual is taxable as profits in lieu of salary in the year of receipt as per the slab rates applicable to the individual,” says Sandeep Jhunjhunwala, Director, Nangia Andersen LLP.

An employee, however, can claim exemption in certain cases. Jhunjhunwala explains: “The employee can get relief under Section 89 of the IT Act read with Rule 21A (protection from enhanced income tax liability on higher sums received in aggregate), in case of termination of employment, if some conditions are met.

“Besides, if it is a voluntary retirement, the severance package so received shall be tax exempt under Section 10(10C) of the IT Act, subject to satisfying the conditions prescribed under Rule 2BA and such compensation does not exceed ₹5 lakh.

“There is room for exemption if the severance package includes LTA and travel allowances. “The benefit of leave travel allowance (LTA) is available to the employee from a former employer as well under section 10(5) of the IT Act. Hence, such an allowance forming a part of the severance package is deductible subject to conditions and quantum as prescribed under Rule 2B of the IT Rules.”

If the retrenched employee was entitled to stock options, the compensation package may fast-track vesting of any unvested options at the time of separation.

“Generally, the difference between fair market value and exercise price of the shares on the exercise date is taxed as perquisite in the hands of employee. If the employee chooses not to exercise his options, there shall be no tax liability to the employee,” says Jhunjhunwala.

Good planning indispensable

Buying specific insurance cover against job losses doesn’t work to your benefit. Claims are usually approved in involuntary job losses only, which is difficult to prove as in most cases the employee is asked or forced to resign.

In short, there is no alternative to good planning. Devise a strategy of a good corpus that will take care of your expenses, debt repayments, investments and tax liability, and back it up with judicious spending, life will be as smooth even if you are handed the pink slip!