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What Are Superannuation Benefits?

A superannuation benefit is a type of retirement pension provided by a company to its employees. Click here to know all about superannuation benefit.

  • 49,003 Views | Updated on: Jun 14, 2024

Retirement planning might sound like something that can wait at the start, but believe us, it is not. The earlier you start, the better. We all live in a fast-paced world and planning a retirement or for that matter an early retirement, should always be your priority.

Therefore, most companies offer a variety of retirement plans to their staff - either as a legal requirement or to keep employees for a prolonged period of time. These retirement benefits offered by an employer are known as superannuation benefits.

Employees tend to ignore these benefits as they are not aware about it. Are you also not aware of it? Keep reading while we help you understand what is superannuation and its benefits.

What is Superannuation?

A superannuation benefit is a type of retirement pension that is provided by a company to its employees. It is a scheme designed for the welfare of the organization’s workers in the form of a pension plan.

A superannuation plan by an organization is also known as the company pension plan. The funds deposited in the account will grow until the retirement or the withdrawal time without any tax implementations.

Therefore, you can say that a superannuation scheme is simply a retirement scheme. Now that you know what superannuation fund is, let’s move forward and understand the working, types and benefits in detail.

What are supperannuation benefits

Working of Superannuation Scheme

An employer contributes a small sum that is assured to the employees’ superannuation accounts. This sum is either managed by the company’s trust or by any insurance company approved by the PFRDA (Pension Fund Regulatory and Development Authority).

For the superannuation fund, a fixed percentage of the basic pay and dearness allowance of the employee is contributed by the employer. This amount is deducted from employee’s account. The employer can contribute a maximum of 15% of the basic pay for the superannuation fund. It is a personal call as you are not obligated to allocate your money to this program as an employee.

While the monthly sum is relatively small, it still builds up a capital large enough to assist you in meeting your expenses after retiring. Employers typically purchase group superannuation plans from insurance firms that manage both individual and group accounts. The interest and profits earned by the insurer via fund investments are placed in your personal account, and the interest rate is generally identical to provident fund rates.

In the event that you switch jobs, you have the option of transferring your superannuation fund to your future employer. If the new company does not provide a superannuation plan, you also have the option of withdrawing the fund or leaving it in the account until retirement, post which it can be taken out. Also, for the defined-contribution plans like NPS.

  • Employees can voluntarily increase the contribution amount to build a higher retirement corpus.
  • A retired person should invest 40 percent of their retirement corpus in an annuity plan that can help them provide a regular pension.

Classification of Superannuation Benefits

There are two types of superannuation benefits on the basis of gains and investments that are listed below:

1.Defined Benefits Plan

It implies that the benefit earned by this sort of superannuation fund is already defined irrespective of how much money is put into the scheme. The pre-calculated benefit is decided by several factors such as - the total number of years you have served for the firm, your income, the age at which you will start reaping the benefits, etc.

It is a somewhat tricky situation, and the employer bears the risk of providing compensation. In case you are eligible to receive this fund, it is a predetermined sum that you receive at periodic intervals after retirement. This sum amount is calculated by a pre-existing formula.

Defined Contribution Plans

This plan is the polar opposite of a defined benefit plan. A defined contribution plan has a fixed contribution, and the benefit is proportional to it and the market forces. This type of superannuation benefit is simpler to manage, and you as the employee assume the risk since you are unaware of the amount you will get post-retirement.

Benefits of Superannuation in Income Tax

Employers and employees both profit from the superannuation scheme with respect to tax savings as per the Income Tax Act of 1961. To be eligible for these superannuation benefits, the organization’s superannuation pension scheme has to be authorized by the Commissioner of Income Tax.

The benefits of income tax are as follows

Benefits for an employer

The employer’s contribution to getting the superannuation fund approved is deducted as a business expense. Any income that is a part of self-managed trusts of an approved superannuation fund is exempted from taxation. The contribution of more than ₹1,00,000 by the employer in respect of any employee is taxable as perquisites.

Benefits for an employee

  • If an employee voluntarily approves the superannuation fund, it is deducted under Section 80C. Theoverall limit of deduction for an employee is ₹1,50,000 under Section 80C.
  • The superannuation payment made to an employee after specified age is exempted from taxation.
  • The benefit received from the superannuation fund on the death or injury of an employee is tax-free.
  • Also, in case the employee becomes incapable of working due to any reason before their retirement, superannuation will be tax-free.
  • Tax exemption can also be availed by transferring the employee’s account under a pension scheme as in Section 80CCD that the Central Government notifies.

Superannuation is a fantastic approach to ensure a financially comfortable retirement. Employer contributes a fixed fund on the basis of employees’ salary, age and several other factors. After retirement, employees can withdraw the amount and reap its benefits. Therefore, it is critical to invest early in a superannuation scheme and use the superannuation fund to be at peace throughout the golden years of life to live the retired life you have always wished for.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors