Everything You Need to Know About the Sinking Fund

When you are handed your society maintenance bill every month, you may have noticed an item which usually makes up around one-third of the total charges and is known as sinking fund in society. What does it really mean and why is it charged every month? Think of it as an investment that you are making every month in insuring your residence will be taken care of in the long term when the need arises to rebuild or construct it due to damage and dilapidation. Let’s understand the why, the how and the how much of a Sinking Fund in detail.

What is a sinking fund?

A sinking fund means, the money set aside in a separate account to pay off a debt, a way to generate funds for a depreciating asset, to pay off a future expense or repay long-term debt. It is a financial technique of ensuring that a monetary lack does not arise causing any hardships in case of insufficient funds. In other words, it literally saves an organized legal entity from ‘sinking’ in debt.

How does a housing society use its sinking fund?

With respect to co-operative housing societies, a sinking fund is to be generated in specific ways and used for a particular purpose. While a housing society is expected to set aside other funds such as reserve fund, repair and maintenance fund, education and training fund, a sinking fund is to be utilised when structural repairs are needed. When a reconstruction/alteration, heavy repairs or additions need to be carried out (with inputs, guidance and opinion of the Architect), the Sinking Fund kicks in as a go-to fund. Such decisions are discussed, negotiated and approved during general body meetings after inviting feedback and opinions from the members of the society.

How does a housing society generate a sinking fund?

It is mandatory and highly recommended that a housing society create a sinking fund, which it can do by collecting financial contributions at a fixed rate from each of its members on a monthly basis and then accumulating it over the years so that a substantial amount is generated. It makes sense to start sinking fund from the time that the society is incorporated and occupied because even though a new building is sturdy and in good standards, yet as time rolls by it falls into relative degradation. Thus a sinking fund collected over a good number of years comes handy for structural repairs.

How does a housing society invest its sinking fund?

It takes a sizeable number of years for a new building to require reconstruction. Thus a sinking fund has a long time to grow through the way of a smart investment policy that is not only beneficial in the long-term but also reliable in general. The Registrar of your district or area instructs you, at the time of registration, to open your society’s bank account in a co-operative bank. Each state has its specific list of state co-operative banks. For example, in Maharashtra, the banks are Maharashtra State Co-operative Bank Ltd and Bombay District Central Co-operative Bank Ltd. After consulting the financial auditor/expert or bank manager, you should decide the best option for your society’s sinking fund investment. Even though you may open accounts with nationalised or urban co-operative banks with prior permission from the Registrar when it comes to day to day transactions. The bye-laws of Maharashtra state that – “A Banking Account shall be opened by the society in the nearest State or District Central Coop. Bank or its branch or in any scheduled co-op Bank… investment in long-term should be made in the District Central Co-operative Bank only.” Such a law has been passed so that the co-operative bank sector can get the necessary boost and can compete with private or nationalised banks. If you need to utilise the sinking fund for structural repairs, you need to undergo an approval procedure from the Registrar after devising redevelopment plans with the help of an Architect.

How is the sinking fund calculated?

To quote the bye-laws, “The sinking fund at the rate decided at the meeting of the general body, subject to the minimum of 0.25 per cent per annum of the construction cost of each flat incurred during the construction of the building of the Society and certified by the Architect, excluding the proportionate cost of the land.” However, the process is not always black and white. Each residence is sold at a different price, higher or lower, depending upon a variety of circumstances. Also, in any given society, there may be 2,3,4 BHK apartments, some buildings may be brand new construction while some wings of the same society may be constructed over an existing structure. Thus the actual cost incurred in making every flat may not be the same in every incident. Therefore it is unfair to charge every resident with a contribution derived from the same fixed rate on different buildings. At times, the builders are also unwilling to give out the actual cost of the construction as they sell the residential unit at a higher price than the original amount it cost to build it. Thus the price a customer pays for flat proportionate land is not always based on the actual.

One way to determine the right rate is to calculate the rate of per sq. ft. of reconstruction of the flats, as that will remain the same for all flats if they were to be reconstructed. This will ensure the exact amount that the society will need to collect as a Sinking Fund charges if the actual reconstruction were to take place in the future.

However, it is imperative to arrive at this amount after consulting an Architect or a Valuer of the property, i.e take professional help to determine the valuation of the construction. The experts may do so by factoring all components including rate per sq feet, valuation of shops, common premises, etc. The amount to be collected from members for the Sinking Fund should be revised every five years by following the same valuation procedure.

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