Many employers provide various retirement benefits to their employees either due to 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 a 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.
1. What is Superannuation benefit?
Dictionary meaning of the word ‘superannuation’ or ‘superannuate’ is to become retired, to retire because of age or infirmity. Superannuation benefit is a retirement benefit offered by employer to its working class. A superannuation is an organizational pension program created by a company for the benefit of its employees. It is also referred to as a company pension plan.
2. 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, benefit derived is already fixed irrespective of contribution to the plan. Pre-determined benefit is based on various factors such as number of years of service in the organisation, salary, age at which employee starts reaping the benefit. This is comparatively complex and risk of generating such benefit lies on employer. Upon retirement, eligible employee receives fixed amount which is determined by pre-existing formula, at regular intervals.
- Defined contribution plans – This superannuation benefit is opposite to defined benefit plan. While in case of defined benefit plan, benefit is fixed and pre-determined, defined contribution plan has a fixed contribution and benefit is directly correlated with the contribution and market forces. This type of benefit is better to manage and risk is with the employee as he does not how much he will receive at retirement. .
3. How does superannuation work?
Employer contributes to a superannuation benefit for /on behalf of employees towards group superannuation policy held by him. Organisations either manage superannuation fund by their own trusts or 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. Employer contributes a fixed percentage (upto maximum of 15%) of employees’ basic pay and dearness allowance and same percentage of contribution need to be made for a particular category of employees.
Though contribution is made by employer, ideally superannuation is part of Cost To Company (CTC). It may also be noted that employee may also voluntarily contribute an additional amount to fund in case of defined contribution plans.
At the time of retirement, employee can withdraw upto 1/3rd of the accumulated benefit and convert balance into regular pension, which is in turn kept in annuity fund for receiving annuity returns at chosen intervals. In case employee changes his job, he has an option to transfer the superannuation amount to new employer. In case new employer does not have superannuation scheme, employee may either choose to withdraw the amount or retain the amount in the fund till retirement and withdraw as discussed above.
4. 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.
5. Income tax benefits
Like any other retirement benefit, superannuation benefit also provides income-tax benefits both to employer and employee. However, such benefits are restricted to approved superannuation fund. This approval is required to be obtained from 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 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
- In case employee has made an additional contribution to the approved superannuation fund voluntarily, it is deductible under Section 80C subject to overall limit of Rs 150,000 under Section 80C
- Payment made to an employee towards an annuity on retirement or after the age specified (as per the fund), is exempt from tax
- 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 superannuation fund on death or injury are tax free
- Interest from a superannuation fund is tax free
- Contribution by employer in respect of any employee in excess of Rs 1,00,000 is taxable as perquisites in the hands of employee