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Superannuation – How It Works, Types And Tax Benefits

Updated on: Apr 5th, 2024


8 min read

Most employers provide various retirement benefits to their employees either due to a statutory mandate or voluntarily to retain employees for a longer period. Such retirement benefits include provident fund, gratuity, National Pension System etc. Superannuation benefit is one such retirement benefit offered to employees by their employers. 

Many times employees ignore this retirement benefit. In fact, many may not even know that they have been provided with superannuation benefit as the contribution to the benefit does not go out of their pocket. Some may also be unaware of the superannuation amount they are entitled to at retirement. Given this, it becomes imperative to understand what the superannuation benefit is in order to help individuals have better financial planning and plan retirement efficiently.

Latest Update in Budget 2020

Under the existing provisions of the Income-tax Act, any contribution made by an employer for/on behalf of the employee to a recognised provident fund exceeding 12% of the employee’s salary is taxable. Furthermore, any contribution to an approved superannuation fund by the employer exceeding Rs 1.5 lakh is treated as a perquisite in the hands of the employee. 

Similarly, the employee is allowed to claim a deduction under the National Pension Scheme (NPS) for 14% of the salary contributed by the Central Government and 10% of the salary contributed by any other employer. However, there was no maximum limit specified for such contributions made by the employer for an employee.

The budget 2020 presented on the 1st of February 2020 announced a combined upper limit of Rs 7.5 lakh in respect of the employer’s contribution to NPS, RPF, and Superannuation fund in a year. That means any contribution made by the employer in excess of Rs 7.5 lakh will be taxable as perquisites in the hand of the employee. Consequently, the interest, dividend or any other income accumulated on such funds or amount in the financial year shall also be treated as perquisite to the extent it relates to the employer’s contribution, which is added to his total income.

What is Superannuation Benefit?

The dictionary meaning of the word ‘superannuation’ or ‘superannuate’ is to become retired, to retire because of age or infirmity. A superannuation benefit is a retirement benefit offered by employers to their employees. Superannuation is an organisational pension program created by a company for the benefit of its employees. It is also referred to as a company pension plan.

Types of Superannuation Benefit

Superannuation benefit is classified into the following in India based on the investment and benefit it offers:  

  • Defined benefit plans –As the name itself suggests, in this kind of superannuation, the benefit derived is already fixed irrespective of contribution to the plan. The pre-determined benefit is based on various factors such as the number of years of service in the organisation, salary, and age at which the employee starts reaping the benefit. This is comparatively complex, and the risk of generating such a benefit lies on the employer. Upon retirement, an eligible employee receives a fixed amount which is determined by the pre-existing formula, at regular intervals.
  • Defined contribution plans – This superannuation benefit is opposite to the defined benefit plan. While in case of a defined benefit plan, the benefit is fixed and pre-determined, a defined contribution plan has a fixed contribution and the benefit is directly correlated with the contribution and market forces. This type of benefit is better to manage, and the risk is with the employee as he does not know how much he will receive at retirement.

How does Superannuation Work?

The employer contributes to a superannuation benefit for/on behalf of employees towards the group superannuation policy held by him. 

Organisations either manage superannuation funds by their own trusts, open a superannuation benefit fund with any of the approved insurance companies or buy the product from insurance companies like LIC’s New Group Superannuation Cash Accumulation Plan or ICICI’s Endowment superannuation plans etc. 

The employer contributes a fixed percentage (up to a maximum of 15%) of employees’ basic pay and dearness allowance, and the same percentage of contribution needs to be made for a particular category of employees. Though contribution is made by the employer ideally. superannuation is part of the Cost To Company (CTC). 

It may also be noted that employees may also voluntarily contribute an additional amount to the fund in case of defined contribution plans. At the time of retirement, the employee can withdraw up to 1/3rd of the accumulated benefit and convert the balance into a regular pension, which is in turn kept in the annuity fund for receiving annuity returns at chosen intervals. 

In case the employee changes his job, he has an option to transfer the superannuation amount to a new employer. In case the new employer does not have a superannuation scheme, the employee may either choose to withdraw the amount or retain the amount in the fund till retirement and withdraw as discussed above.

Types of Annuity Options Available

Common annuity options available are:

  • Payable for life;
  • Payable for life guaranteed for 5 yrs/10 years/15 years;
  • Payable for life with a return of capital;
  • Payable jointly on the life of husband and wife.

Income Tax Benefits

Like any other retirement benefit, superannuation benefit also provides income tax benefits to both employer and employee. However, such benefits are restricted to an approved superannuation fund. This approval is required to be obtained from the Commissioner of Income Tax in accordance with the rules set out in Part B of the Fourth Schedule of the IT Act.

For the Employer
Contribution to an approved (by income tax department) superannuation fund is deductible business expense, and any income received by self-managed trusts of an approved superannuation fund is also exempt.

For the Employee

  • Employee’s contribution to the approved superannuation fund is deductible under Section 80C subject to an overall limit of Rs 1,50,000.
  • The amount withdrawn, if any, by the employee at the time of change of job is taxable under the head “Income from other sources”
  • Any benefit received from the superannuation fund on death or injury is tax-free.
  • Interest from a superannuation fund is tax-free.
  • On retirement, 1/3 of the commuted fund is fully exempt from tax, and the remaining amount, if transferred to an annuity, is tax-free, and if the amount is withdrawn, it is taxable in the hands of the employee.
  • Employer’s contribution of up to Rs 1.5 lakh in respect of an employee is exempt. However, if the contribution exceeds Rs 1.5 lakh, the amount in excess will be taxable in the hands of the employee as a perquisite.

Related Articles:

Deductions Allowed Under Section 80

80C Deductions

Frequently Asked Questions

Is superannuation taxable under the new regime?

Employee Contribution to a superannuation fund is eligible for deduction u/s 80C, and as such amount will not be eligible for deduction if you opt for a new tax regime. 

Is the superannuation fund exempt?

Payment made from the Superannuation fund is exempt in the following cases:

  1. On the death of a beneficiary 
  2. To an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement; or
  3. by way of refund of contributions on the death of a beneficiary; or
  4. by way of transfer to the account of the employee under the NPS Scheme framed by the central government u/s 80CCD(2).
What is the difference between NPS and superannuation funds?

In superannuation funds, the tax-free withdrawal amount is 33%, whereas in the case of NPS, it is 60%. In the case of buying annuities in superannuation funds, the amount of GST is 1.8%, whereas it is zero in the case of NPS. NPS offer a higher return than superannuation. (Returns in NPS are subject to market risk).

Is superannuation over and above 80C?

Employee Contribution to superannuation is eligible for exemption under Section 80C. Thus, this exemption is available only under the Old Tax Regime.

Can I exit NPS before superannuation?

Normal Exit from NPS is possible only after the age of 60. However, In case of non-government employees, premature withdrawal from NPS is possible after 5 years of mandatory subscription. If the corpus amount is less than Rs 2.5 lakhs, then 100% withdrawal is possible. In case of a corpus exceeding Rs 2.5 lakhs, 80% can used to purchase an annuity and a balance of 20% is allowed as a lump sum withdrawal. 

Is superannuation taxable on resignation?

If an employee wants to withdraw superannuation at the time of resignation, then the entire amount is taxable. 

Can I exit from NPS after 10 years?

For non-government employees, premature withdrawal from NPS is possible after 5 years of mandatory subscription. If the corpus amount is less than Rs 2.5 lakhs, then 100% withdrawal is possible. In case of a corpus exceeding Rs 2.5 lakhs, 80% can used to purchase an annuity and a balance of 20% is allowed as a lump sum withdrawal.

What is Section 10(13) superannuation fund exemption?

Payment from the superannuation fund is exempt in the following cases

  1. On the death of the beneficiary
  2. To employee on commutation of an annuity at retirement or incapacity
  3. Refund of contribution on the death of beneficiary
  4. Transfer to a pension scheme under 80CCD (NPS)

Quick Summary

Superannuation is a retirement benefit offered to employees by their employers. Types include defined benefit and defined contribution plans. Employers make contributions on behalf of employees towards the superannuation benefit fund. At retirement, 1/3 of the accumulated benefit can be withdrawn. Options include annuity plans. Superannuation provides income tax benefits to both employer and employee. The Budget 2020 introduced a combined upper limit of Rs 7.5 lakh for contributions to NPS, RPF, and Superannuation fund.

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