The employer makes regular contributions to a pension fund. This is known as superannuation. Employees receive this retirement benefit from their employers. The employee's contribution to the approved superannuation fund is deductible under Section 80C. The company contributes a set amount to their superannuation fund from each employee's basic pay and dearness allowance. Let's get into the details of the topic.
What Is the Superannuation Scheme?
Superannuation, in simple terms, is a retirement benefit plan offered by the employer to his employees. Further, it is also known as the company pension plan, as it is the retirement plan devised by the company for the benefit of its employees. Companies can apply under the Superannuation scheme provided by approved insurance companies. Every year, it has to contribute a certain amount to the group scheme on behalf of its employees. An employee, on retirement, can withdraw a certain amount from this as his pension.
Types of Superannuation Schemes
There are two basic types of superannuation schemes in India.
Defined Benefit Plan
In this type of superannuation plan, the benefits one gains on retiring depend entirely on rank, age of retirement, service period, and final salary. On retiring, the employee receives a predetermined amount as a pension at fixed intervals. Additionally, the defined contribution plan is more complex, and the risk involved in this plan lies entirely on the employer.
Defined Contribution Plan
Most companies prefer this plan over the defined benefit plan because of the ease of management. Further, the risks involved in this plan lie entirely on the employee as they wouldn’t know the exact amount they would receive after retirement. Additionally, the benefits the employee would receive depend on his contribution to the superannuation plan and the market forces at the time of his retirement.
Defining the Category of a Superannuation Benefit
Superannuation benefits come in two categories based on investment and profit. These are what they are:
- Plans with defined contributions Compared to the other plan, this superannuation benefit is very different.
- The benefit from a defined contribution plan is directly correlated with the contribution made, and the contribution is fixed.
- Benefits are also influenced by market forces in effect at the time of benefit distribution.
- Easy management is a benefit of defined contribution plans. The only problem is that the employee is taking the risk because they don’t know how much they’ll get when they retire.
- Fixed-benefit arrangements No matter how much is contributed, the benefit in this type of superannuation is already fixed.
- The employee benefit is fixed and predetermined.
- The number of years an employee has worked for the company, the age at which they began receiving benefits, their salary, and other factors is the foundations upon which predetermined benefits are based.
- This kind of plan is fairly complex, and the employer bears the risk of it.
- A fixed sum that is regularly determined is given to the eligible employee upon retirement.
Working of Superannuation
The superannuation fund of the employees receives a guaranteed contribution from the employer. On behalf of the employer, this fund is managed by the company trust or by any authorized insurance provider. The employer contributes a set percentage of the employee’s basic salary and dearness allowance to the superannuation fund for a specific group of employees.
In actuality, the employer makes this contribution, making it a part of the company’s costs (CTC). However, in the case of defined contribution plans, an employee may also make a voluntary additional contribution to the fund.
How is the Superannuation Benefit Calculated
Superannuation calculations can be complicated. An employee must be associated with the company for a minimum of three years to avail of maximum benefits.
| Less than a year | NIL |
| One to two years | 50% of contribution + interest |
| Two to three years | 75% of contribution + interest |
| More than three years | 100% of contribution + interest |
Types of Annuity Options
There are four common types of annuity options available in India
- Payable for life
- Further, payable for life guaranteed for a period of 5, 10, or 15 years
- Payable for a lifetime with capital return
- Payable for the joint lifetime of husband and wife
Income Tax Benefits of The Superannuation Scheme
The superannuation scheme brings many income tax benefits to both the employer and the employees. But to be eligible to avail of these benefits, the organization’s superannuation scheme must be approved by the Commissioner of Income Tax, according to the Income tax slab.
Income Tax Benefits for Employers
- The contribution of the employer to the superannuation fund is allowed as an expenditure deduction under Section 36 of the Income Tax act.
- Further, income received by the trustees on behalf of an approved superannuation fund is exempt from Income Tax under Section 10 of the Income Tax act.
- Employee’s contribution to the superannuation fund is eligible for an income tax deduction under 80c deduction. The overall limit is ₹1,50,000.
- Additionally, benefits paid to the employee on account of his demise or critical injury is eligible for tax exemption.
- Further, the interest amount received by an employee under the superannuation scheme is exempt from income tax.
- Additionally, the amount the employee withdraws from the annuity fund after retirement (⅓ rd) is also free from taxation.
- Further, the tax on the balance amount depends on the employee’s decision. The amount becomes taxable if the employee withdraws it. If he chooses to transfer the balance amount to the annuity fund, then the amount becomes tax-free.
- Additionally, the amount an employee withdraws at the time of change of job is taxable under the head ‘Income from other sources’.
- Therefore, income from pension or annuity funds is taxable.
Latest Updates on Superannuation Scheme for Income Tax Benefits
Under the current regime of the Income Tax Act, an employer’s contribution to any provident fund is taxable. Further, if it exceeds 12% of the employee’s salary. Additionally, if the employer’s contribution to an approved scheme exceeds ₹1,50,000, then it is treated as the employee’s dividend and is taxable. Moreover, an employee is eligible to claim a tax deduction under the NPS for 14% of the Central Government’s salary and 10% of other employers’ salaries.
The annual budget for the year 2020, provisioned a new combined upper limit of ₹7,50,000 for the employer’s contribution to retirement funds like NPS, EPF, and funds. Further, under the new regime, any contribution made by the employer over ₹7,50,000 is taxable. Therefore, the interest, dividend, or other benefits accumulated on retirement funds are added to the employer’s income and are taxable.
Learn more about Income Tax Benefits for Women
Conclusion:
Superannuation is a type of fund that an employee receives from their employer as a pension benefit when they retire. Premised on the employee’s salary, age, and other considerations, the employer contributes a set amount to the fund. The employee has the option to withdraw this sum after retirement and profit from it.
If you change jobs and your new employer does not offer a superannuation fund, you should withdraw your tax-exempt superannuation amount and keep it in your superannuation account so that it will be available for your retirement benefits. Try to get in touch with Vakilsearch‘s experts if you are having trouble with the paperwork for the Superannuation scheme. Vakilsearch is India’s top provider of legal services. Their professionals will assist you with the documentation and any legal procedures for which you require assistance.
Read more,
