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  • Understanding Taxation on Approved Superannuation Fund

    Among the tax benefits available to the people of India is the exemption on contribution to and withdrawals from approved superannuation funds. To understand the concept let us first look at what an approved superannuation fund is.

    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.

    Though the monthly amount may be a small one, it creates a corpus large enough to help sustain your needs after retirement. Employers generally take group superannuation policies with insurers such as LIC, which maintains both the group account and your individual account. The principal amount, interest and profits made through investments in funds (by the insurer) are deposited in your individual account. The rate of interest is usually similar to provident fund rates.

    When you retire, you can withdraw 25% of this superannuation fund amount, and that amount is exempted from taxation. The remaining 75% is invested in an annuity fund in your name, to ensure regular returns during your retirement period. You can choose to receive annuity returns either monthly, quarterly, half-yearly or annually. This amount that you get periodically, will be considered as an income and hence is taxable.

    If you change jobs and the next employer does not run a superannuation scheme, then you can either withdraw the whole amount or let the fund continue until your retirement.

    Approved Superannuation Fund:

    An approved superannuation fund is a fund that is approved by the Commissioner of Income Tax. The rules pertaining to this can be found in Part B of the Fourth Schedule of the Income Tax Act. Superannuation funds are approved by the Income Tax Commissioner based on whether or not they are meeting certain conditions. You can confirm from your employer whether your superannuation fund is approved or not. Tax exemptions are available only to approved superannuation funds.

    Taxes Applicable on Approved Superannuation Fund:

    The taxation on various components of an approved superannuation fund are as follows:

    • Employee’s contribution (under Section 80C of the Income Tax Act, which puts a cap of investment under the section at Rs. 1.5 lakh) is exempt from taxation.
    • You do not have to pay tax on interest received on the superannuation funds.
    • Up to Rs. 1 lakh of employer’s contribution to a superannuation fund is exempt from tax. Any amount above Rs. 1 lakh will be subject to taxation.
    • If an employee wants to withdraw their superannuation fund at the time of resigning from a company, the entire amount will be subject to tax. The amount will be added under ‘Income from Other Sources’ and will be taxed as per the income category the total falls under. There are exceptions to this rule, as you will see below.

    Exceptions Over Payment of Superannuation Amount:

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

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

    Frequently Asked Questions on Approved Superannuation Funds:

    1. How do I know if my superannuation fund is approved or not?

      You can check with your employer or check the documents or charter of your superannuation fund.

    2. If I am changing my job and going to a company that does not have a superannuation fund, can I withdraw the money?

      Yes you can, but the entire amount will be subject to tax. Instead you could let the amount be in the superannuation account and allow it to accumulate for your retirement benefits.

    3. If withdrawing the money from a superannuation fund leads to taxation, what else can I do with it?

      There is no tax on the amount if you reinvest it in an annuity scheme that ensures a regular – monthly, quarterly, half-yearly, yearly, as you choose – income for you during retirement.

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