What is Superannuation? Meaning, Benefits & Types

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 is superannuation, let us move forward and understand its working types and benefits in detail.

How the Superannuation Scheme Works?

The mechanics of a superannuation scheme are fairly straightforward. Here is how it works:

• The Contribution: Every month (or year), your employer puts a fixed percentage of your salary into the superannuation fund. In many cases, this is purely employer-funded, meaning it does not even come out of your take-home pay, though it is considered part of your total CTC (Cost to Company).
• The Investment Phase: The fund manager invests this corpus in various debt and equity instruments. The idea is to let the power of compounding do the heavy lifting over 20 or 30 years.
• The Vesting: You usually become eligible for the full benefits after a certain period of service with the company.
• The Payout: When you retire, you do not usually get the entire cash at once. Under current Indian tax laws, you can generally withdraw one-third of the accumulated corpus as a tax-free lump sum. The remaining two-thirds must be converted into an annuity, which provides you with a monthly or quarterly pension.

Types of Annuity Options Available

Superannuation funds offer various annuity options to retirees. These options determine how superannuation works and how the accumulated superannuation savings will be disbursed during retirement:

• Lifetime Annuity: Provides regular payments for the rest of the retiree’s life, ensuring they do not outlive their savings.
• Fixed-Term Annuity: Offers payments over a specific period, such as 10 or 20 years. After the term ends, payments stop, even if the retiree is still alive.
• Reversionary Annuity: Continues to make payments to a nominated beneficiary, such as a spouse, after the retiree’s death.
• Guaranteed Period Annuity: Ensures payments are made for a minimum period, even if the retiree dies before the end of that period. If the retiree passes away early, the remaining payments go to a beneficiary.

What is a Superannuation Retirement Benefit?

When an employee retires from service after reaching the retirement age, the accumulated corpus fund becomes available. What they actually receive depends on how the scheme is structured.

In most approved superannuation funds, the retiring employee can get up to one-third of the total corpus as a tax-free lump sum. You will get a Form 16A certificate for the same, which then can be further verified with the help of the Form 26AS. The remaining two-thirds must be used to buy an annuity, which then generates regular income. This annuity income is taxable in the hands of the employee as income from other sources.

Classification of Superannuation Benefits

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

Defined Benefits Plan

In a defined benefit arrangement, the retirement payout is fixed in advance, usually as a percentage of the final salary multiplied by years of service. The formula might look like: 1/60th of the final salary for each year of service. The employer bears the investment risk entirely; if the fund underperforms, the employer still has to pay the promised benefit.

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 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 when you file income tax returns. 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

Superannuation offers several benefits to the employees also. Let us take a quick look at those benefits:

• If an employee voluntarily approves the superannuation fund, it is deducted under Section 80C. The overall limit of deduction for an employee is ₹1,50,000 under Section 80C.
• The superannuation payment made to an employee after a 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.

Difference Between Retirement and Superannuation

While the two terms are often used interchangeably in casual conversation, in the world of BFSI, they represent two different concepts.

Superannuation is a fantastic approach to ensure a financially comfortable retirement. Employers contribute a fixed fund on the basis of employees’ salaries, 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 and live the retired life you have always wished for.

FAQs on Superannuation Benefits