What is superannuation scheme and how it works?


What is Superannuation scheme in India and how does the scheme exactly work?

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Hi Namita,

As far as I know, here are a few points about Superannuation Scheme.

Superannuation is a retirement benefit offered by an employer as a pension program for the benefit of its employees. It is also commonly called a company pension plan.

The common statutory and voluntary retirement benefits are provident funds, gratuity, national pension scheme, superannuation, etc.

Superannuation helps employees to have better retirement plans for beneficial monetary gains.

Based on the investments and benefits, Superannuation can be predetermined and fixed, irrespective of the contribution, based on factors like the age number of years of service in the organization, salary, age at which employee starts reaping the benefit. The employee upon retirement will receive a fixed amount that is determined by the pre-existing formula.

Alternatively, with a fixed contribution, the benefits could be as per the market forces.

The employer contributes to a superannuation benefit for employees towards the group superannuation policy held by him and manages it by own fund or through any approved insurance companies. Superannuation is generally a part of CTC with the employer’s contribution of a fixed percentage with an upper limit of 15% of employee’s basic pay and DA. A similar contribution has to be made by the employee and if the employee volunteers to contribute more can do so.

During retirement, the employee can withdraw up to one-third of the accrued benefit and receive the rest as a regular pension. This will be tax-free; if the amount is withdrawn, it is taxable in the hands of the employee.

Upon the job switch, the employee can transfer the amount to the new employer and if the subsequent employer has no such scheme, the employee may either choose to withdraw the amount or retain the amount in the fund till retirement and withdraw as aforesaid.

Common annuity options available are:

Payable for life;

Payable for life guaranteed for 5/10 /15 years;

Payable for life with a return of capital;

Payable jointly on the life of husband and wife.

From an income tax perspective, superannuation benefits are restricted to an approved superannuation fund. This approval is required to be obtained from the Commissioner of Income Tax in accordance with the rules set out in Part B of Schedule IV of the Income Tax Act and applicable rules.

For the Employer, the contribution to the approved superannuation fund is a deductible business expense and any income received by self-managed trusts of an approved superannuation fund is also exempt.

For the Employee, the Employee’s contribution to the approved superannuation fund is deductible under Section 80C subject to the overall limit as prescribed thereunder. If the contribution exceeds the prescribed limit, the amount in excess will be taxable in the hands of the employee as a perquisite.

Amount withdrawn if any by the employee at the time of job switch is taxable under the head Income from other sources.

Any benefit received from superannuation fund on death or injury, interest from superannuation funds is tax-free.

Bhuvana Anand

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