What is a Lump sum Payment?
A lump sum payment refers to a one-time, fixed amount of money paid to an employee, contractor, or individual, rather than being distributed over multiple periods. It is often used for bonuses, severance pay, relocation allowances, or project-based compensation.
Also read: What is Balance of Payments?
What is the difference between lump sum investments and lump sum payments?
A lump sum investment is when an investor invests large sum of money he or she has. For example, if someone wants to invest all of his money in mutual funds or other investment vehicles, this is referred to as a lump sum investment.
Similarly, a lump sum payment is the same as a regular payment, but it is paid in a different way. It does not entail any instalments or breakage of the entire sum, as the name implies.
Lump sum v/s Annuity
An annuity is a product, not a payment, in technical terms. You purchase an annuity from your pension provider in exchange for a guaranteed income for the rest of your life. The amount you receive is determined by the size of your pension pool, whether you took a lump-sum payment at the start, and other considerations such as your health and life expectancy. Many people combine the lump-sum and annuity choices by accepting up to 25% of their pension as a lump-sum at the start and putting the remainder in a lifetime annuity.
What are the benefits of lump sum payments?
Lump sum amount provide you more control over your funds, allowing you to spend or invest them whenever and however you want. Since lump-sum payments are income tax-free up to 25% and annuities are taxed as income, many people will choose to take the large sum amount as a lump-sum payout to save money. It also offers an immediate financial boost, which is very important if one has a mortgage or bills to pay off, or if one has a major upcoming obligation.
How are Lump Sum Payments calculated?
Lump-sum is driven by the principle of future value. The lump-sum calculator estimates the future value of your investment at a given interest rate. You must apply the following formula: FV = PV(1+r)^n FV = Future Value PV = Present Value r = Rate of interest n = Number of years
For example, suppose you deposited Rs 1,00,000 in a mutual fund programme for a period of 20 years. The estimated rate of return on your investment is ten percent. FV = 1,00,000(1+0.1) is a formula for calculating the investment's future value. 20 FV is equal to Rs 6,72,750. You put in Rs 50,000 and it has increased to Rs 6,72,750. Rs 6,72,750 - Rs 1,00,000 = Rs 5,72,750 in wealth gain.
Also read: What is a Pay Stub?
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