What is Flat Penalty?
A Flat Penalty is a fixed amount charged for overdue payments, regardless of the outstanding amount or the duration of the delay. This method is simple but can often lead to disproportionately high penalties.
Example:
Invoice Date: April 1, 2024
Billing Frequency : Quarterly
Invoice Amount: ₹5,000
Due Date: April 20, 2024
Flat Penalty Rate: ₹500 per month
Delayed Duration: 2 months 10 days
Flat Penalty Calculation:
₹500 for 10 days ( April 21 to April 30) + ₹500 for May + ₹500 for June
In this case, a flat penalty of ₹1,500 is charged in July 2024.
What is Simple Interest?
Simple Interest is calculated based on the overdue amount and the duration of the delay. This ensures penalties are proportional to both the outstanding amount and the delay period, making it a fairer method.
Example:
Invoice Date: April 1, 2024
Invoice Amount: ₹5,000
Billing Frequency : Quarterly
Due Date: April 20, 2024
Simple Interest Rate: 21% per annum
Delayed Duration: 71 days (April 21 to June 30, 2024)
Simple Interest Formula:
Principal x Rate x Day’s÷ 365 : ₹5,000 x 21% x 71 ÷ 365
In this case, an interest of ONLY ₹204 is charged in July 2024.
Why Simple Interest is Better?
Fair for All Members: Simple Interest charges are proportional to the overdue amount and the delay. It ensures members who delay longer pay higher penalties, encouraging timely payments.
Avoids Excessive Penalties: A flat penalty can lead to extremely high charges, which may be unfair to members, especially for smaller overdue amounts or short delays.
Aligns with Non-Profit Goals: As a non-profit organization, a housing society must prioritize fairness while maintaining financial discipline.
Comparison: Flat Penalty vs. Simple Interest
How to Switch from Flat Penalty to Simple Interest
Switching to Simple Interest is a straightforward process but requires approval from your committee. Here's how you can make the transition:
Discuss the Change: Call an AGM / GBM with the members to explain the benefits of Simple Interest over Flat Penalty.
Conduct a Poll: Create a poll to gather feedback and votes from the members.
Amend the Byelaw: Once approved, amend the society’s bylaws to reflect the new interest calculation method.
Implement the Change: To update your late payment interest settings, please contact support@adda.io.