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What is Superannuation? Meaning, Benefits & Types

Superannuation provides structured retirement savings with tax benefits, ensuring financial security for retirees.

  • 50,017 Views | Updated on: Jul 03, 2024

Superannuation is a pillar of retirement planning, providing a structured approach to savings with built-in superannuation tax benefits. It offers individuals a reliable means to accumulate funds throughout their working years, ensuring financial security during retirement. With diverse annuity options and benefit classifications, superannuation caters to the varied needs of retirees, empowering them to embrace their golden years with confidence.

As employers and employees navigate the complexities of retirement planning, superannuation emerges as a beacon of assurance, incentivizing savings while offering flexibility and security. Its tax-efficient framework encourages participation, ultimately paving the way for a financially sound retirement. With its ever-evolving landscape, superannuation remains a steadfast pillar of financial wellness, enabling individuals to embark on their retirement journey with peace of mind.

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.

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 the 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, after which it can be taken out. Also, for defined-contribution plans like NPS, the following are the criteria:

  • 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.

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.

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

A Defined Benefits Plan guarantees a specific retirement benefit amount, which is usually calculated based on a formula considering factors such as salary history, years of service, and age. The employer bears the investment risk and is responsible for ensuring there are sufficient funds to pay the promised benefits. This plan offers financial security to employees as they know the exact amount they will receive upon retirement.

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 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

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.

Key Takeaways

  • Superannuation is a retirement pension provided by a company to its employees.
  • Employers contribute a percentage of the employee’s basic pay and dearness allowance to a superannuation account.
  • Employees can transfer their superannuation funds to a new employer or leave the funds until retirement if the new employer does not offer a superannuation plan.
  • Superannuation contributions qualify for deductions under Section 80C, and certain benefits, such as payments received after retirement age or injury, are tax-exempt.

Conclusion

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 and live the retired life you have always wished for.

FAQs on Superannuation Benefits


1

Is superannuation taxable under the new regime?

Under the new tax regime, the tax treatment of superannuation withdrawals can vary. Generally, lump-sum withdrawals from a superannuation fund may be subject to taxation based on the retiree’s age and the components of the superannuation benefit. It’s essential to check the specific tax rules applicable in your jurisdiction.



2

Is the superannuation fund exempt?

Superannuation funds typically enjoy tax-exempt status on their earnings within the fund, provided they comply with relevant regulations and are maintained for the purpose of providing retirement benefits. However, individual contributions and withdrawals may have different tax implications.



3

What is the difference between NPS and superannuation funds?

The National Pension System (NPS) and superannuation funds both aim to provide retirement income, but they differ in structure and regulations. NPS is a voluntary, defined contribution retirement savings scheme available in some countries, offering flexibility in investment choices and tax benefits. Superannuation funds are often mandatory and may offer both defined benefits and defined contribution plans, with specific regulatory requirements and employer contributions.


4

Is superannuation over and above 80C?

Superannuation contributions made by employers are typically considered separate from the benefits under Section 80C of the Income Tax Act, which includes various investment options eligible for tax deductions. However, voluntary contributions made by employees to their superannuation fund may fall under the purview of Section 80C, subject to the overall limit.


5

Can I exit NPS before superannuation?

Exiting the NPS before superannuation is generally allowed, but it may come with certain restrictions and penalties. Partial withdrawals are permitted under specific conditions, such as critical illness or higher education expenses, but full exit before the age of 60 is usually restricted.


6

Can I exit from NPS after 10 years?

Yes, it is possible to exit from the NPS after 10 years, but this would typically involve purchasing an annuity with a portion of the accumulated savings and withdrawing the remaining amount as a lump sum, subject to specific rules and conditions.


7

What is Section 10(13) superannuation fund exemption?

Section 10(13) of the Income Tax Act provides exemptions for payments received from an approved superannuation fund. This exemption applies to certain benefits, such as lump-sum payments made upon retirement, provided the fund complies with regulatory requirements. The specific conditions and limits for this exemption can vary, so it’s essential to consult the relevant tax laws or a tax professional for detailed guidance.

- 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

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