Approved Superannuation Fund - Complete Information

What is a Superannuation Fund?

A Superannuation Fund is a retirement fund offered by your employer. The employer contributes 15% of your basic salary to this fund. It is not mandatory for you as an employee to contribute to the fund, but you may do so if you wish.

Benefits of Superannuation Fund

The superannuation fund makes an individual financially secure as it offers a host of benefits, such as:

1. Low Fees: Superannuation funds generally charge lower administrative and management fees.

1. Easy to Understand: It is easy to track and manage without needing financial expertise due to its simple structure.

1. Flexible Investment Options: Based on your risk appetite and retirement goals, choose from equity, debt, or hybrid investments.

1. Portability: Your fund stays with you even if you change jobs, continuing to grow throughout your career.

1. Early Access to Emergencies: Partial withdrawals are allowed in situations such as medical emergencies or job loss.

1. Regular Pension Post-Retirement: The accumulated amount provides a steady monthly income after retirement.

The additional benefits of superannuation fund are mentioned below:

1. Offers tax Benefits on contributions and earnings from approved funds.

1. Employer contributions up to 15% of basic plus DA (Dearness Allowance), adding to your retirement savings.

1. Many plans offer built-in life insurance.

1. Funds can sometimes be used to buy your first home.

1. Access to a range of investment options for better growth.

1. Some plans include professional guidance for fund management.

1. Funds are often safeguarded during bankruptcy or severe financial stress.

How does Superannuation Work?

The details about how the superannuation works are given below:

1. Employers contribute on behalf of employees to a group superannuation policy for their retirement benefits.

1. Companies can manage superannuation through their own trust funds; approved insurance companies, or buy specific plans, such as LIC’s New Group Superannuation or ICICI’s Endowment plans.

1. Up to 15% of an employee’s basic salary plus a dearness allowance is contributed by the employer.

1. This contribution percentage must be consistent across a defined employee group.

1. Superannuation is considered part of the employee’s Cost to Company (CTC) though it is funded by the employer.

1. Under defined contribution plans, employees may also voluntarily contribute extra.

1. Withdrawal of one-third of the accumulated amount and use of the remaining balance to buy an annuity that pays a regular pension is applicable for employees during retirement.

1. Transfer the funds to the new employer’s superannuation scheme (if available) in case of a job change.

1. If the new employer does not offer a scheme, then the employees can withdraw the amount (taxable) or retain it until retirement and then withdraw/purchase annuity.

Types of Superannuation Benefits in India

Superannuation benefits are broadly categorized based on how contributions and returns are structured:

Defined Benefit Plans

1. Regardless of how much is contributed over time, the payout is fixed in advance.

1. The benefit depends on factors, such as years of service, final salary, and retirement age.

1. The employer is responsible for ensuring the promised payout, and they bear the investment risk.

1. The employee receives a predetermined pension amount at regular intervals after retirement.

1. These plans are more complex to manage for employers.

Defined Contribution Plans

1. The contribution amount is fixed, but the final benefit varies based on the fund’s performance.

1. Returns are linked to market conditions and the amount contributed over the years.

1. The investment risk is borne by the employee, as the final retirement corpus is not guaranteed.

1. These plans offer more flexibility and can be easily administered.

1. Based on accumulated contributions, the employees may receive a lump sum or annuity.

When Can I Withdraw the Superannuation Fund ?

The superannuation fund can be withdrawn under the following circumstances:

Retirement Withdrawal:

1. At retirement, an employee can withdraw one-third of the superannuation fund as a lump sum.

1. The remaining two-thirds will be converted into a pension, providing regular annuity payouts at chosen intervals.

Job Change Scenario:

The superannuation balance can be transferred to the new employer in case of job change, provided the new organization also offers a superannuation scheme.

If New Employer Has No Scheme:

The employee may:

1. Withdraw the full amount (taxable), or

1. Leave the fund untouched until retirement and withdraw later.

Tax Implication on Early Withdrawal:

If the superannuation amount is taxable as "Income from Other Sources" during income tax filing, if withdrawn at the time of job switch.

Types of Annuity Options Available

The main types of annuity payout options available are listed below:

1. Lifetime annuity paid until the annuitant’s death.

1. Lifetime annuity with guaranteed payouts for 5, 10, or 15 years.

1. Lifetime annuity with return of capital.

1. Joint life annuity is paid on the lives of both husband and wife, continuing until the second death.

Difference Between Retirement and Superannuation

The difference between superannuation and retirement are mentioned below:

Income Tax Benefits of Superannuation Fund

Superannuation funds offer various Income Tax benefits like other retirement benefits and are restricted to an approved superannuation fund. The benefits are mentioned below:

For Employers:

1. Contributions to an approved superannuation fund are treated as deductible business expenses.

1. Tax is exempt for the income generated by self-managed trusts, of approved superannuation funds.

For Employees:

1. Employee’s contributions are eligible for deduction under Section 80C, subject to the Rs.1.5 lakh annual limit.

1. Up to Rs.1.5 lakh employer contribution annually is tax-free.

1. Contributions above Rs.1.5 lakh are taxed as perquisites.

1. From Budget 2020, a combined cap of Rs.7.5 lakh per year applies to employer contributions towards NPS, RPF, and superannuation funds. Excess over this limit is taxable as a perquisite.

1. Interest or returns earned on employer contributions to funds, such as NPS, superannuation fund, RRF, etc., in the financial year will also be treated as perquisites. 

1. Amounts withdrawn upon changing jobs are taxable under “Income from Other Sources.”

1. Benefits received due to death or injury are fully exempt from tax.

1. Interest earned on the fund is tax-free.

On retirement:

1. Up to one-third of the accumulated corpus (commuted portion) is tax-free.

1. The remaining amount, if converted into an annuity, is also tax-exempt.

1. If the remaining amount is withdrawn, it becomes taxable in the employee's hands.

Note: The Commissioner of Income Tax will provide approval in accordance with rules set out in Part B of the Fourth Schedule of the IT Act.

Exceptions Over Payment of Superannuation Amount

Under Section 10(13), payment of superannuation amount is not taxable under the following circumstances:

1. If the payment is made after the death of the employee to their heirs;
2. If the payment is made as refund of contributions on the death of the employee;
3. If the payment is made to an employee as an annuity plan after their retirement (voluntarily or due to age limit);
4. If the payment is made to an employee who is incapacitated by a disability or illness or other reasons
5. Contributions made before April 1, 1962 are exempt from taxation.