Nowadays employers provide different benefits to their employees. The idea is to reduce attrition and propel employees to stay for a longer period with them.A Superannuation Fund is one of the means which employers use to provide benefits to its employees.
It is in the interest of the employees to know the working and Taxation of Superannuation Fund so that they can make the best use of it.
In this post, we go on to describe what is Superannuation Fund and its Benefits.
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What is Superannuation Fund?
Superannuation Fund is a retirement benefit offered by the employer. Usually, companies go on to make this benefit as part of the salary structure (CTC – Cost to Company). So, it reduces the take-home salary of the employee.
It is optional for the employee to take the benefit of Superannuation Fund. If the employee does not want the benefit, then he/she can go for taking this amount in their monthly salary. However, the option is available only at the start of the job.
In some cases, the employer may not give the option to opt out of Superannuation Fund benefit.
Superannuation Fund Contribution
Typically, the contribution to Superannuation fund comes from the employer. The employer can contribute 15% of the basic salary of the employee to this fund. As far as the employee is concerned, it is not mandatory for the employee to contribute to the Superannuation Fund. However, an employee can make a contribution if they wish.
Small monthly contributions towards Superannuation fund go on to create a large corpus which proves enough to sustain the needs after retirement.
Employers go on to take group superannuation policies with insurers such as LIC, which maintain the group account as well as the individual account. The principal amount, interest, and profits are deposited in the individual account.
The rate of interest in a Superannuation fund is similar to provident fund rates.
Superannuation Withdrawal Rules India
Once the employee retires, he/she can withdraw 25% of the superannuation fund amount. The amount is exempt from taxation. The remainder (i.e., 75%) is invested in an annuity fund in the name of the employee and goes on to provide regular returns during the retirement period.
The annuity returns can be received monthly, quarterly, half-yearly, or annually. This amount which is received periodically is considered as an income and hence is taxable.
If the employee changes job and the next employer do not offer a superannuation scheme, then in such a situation the entire amount in the superannuation fund can be withdrawn or else it can be continued until the retirement period.
Approved Superannuation Fund
A Superannuation Fund becomes an Approved Superannuation Fund when it is approved by the Commissioner of Income Tax. The guidelines for this have been provided in Part B of the Fourth Schedule of the Income Tax Act.
Income Tax Commissioner approves Superannuation Funds when they go on to meet certain conditions.
Employees can confirm from their employer whether their Superannuation Fund is approved or not. However, it should be noted that tax exemptions are applicable only for the approved superannuation funds.
Superannuation Fund Benefit in India
A superannuation fund is a retirement benefit offered by the employer to their employees. Moreover, the term “Superannuation” is synonymous to Retirement.
In simple terms, Superannuation fund benefit can be considered as a pension plan bought by the employer for their employees. The employer makes its contribution to a Group Superannuation Policy. At the time of retirement, the employee starts getting a pension.
Superannuation benefit comes in two variants in the form of the defined benefit plan or as a defined contribution plan.
In the defined benefit plan, a formula is worked out based on the last salary drawn by the employee. It results in a fixed amount which the employee is entitled to receive every month as pension or annuity.
However, this amount may or may not increase with Inflation. So, in defined benefit plan both the Insurer as well as the employer work out on the return that is to be generated. They also decide the contribution that is to be made so that the defined level is reached.
The second variant is the defined contribution plan which is usually opted by most of the employers. Here, a maximum of 15% of the basic salary of the employee is contributed by the employer to the Superannuation Fund. If employees want, they can also contribute voluntarily to this fund. At the time of retirement, the corpus that is accumulated in the superannuation fund can be used to start with the pension or annuity amount.
Superannuation Fund Taxability – Tax Rules
Since the employer’s contribution towards superannuation fund is not received as a monthly salary, so it is not taxable in the hands of the employees. However, according to one of the clauses, if the employer contribution in a given financial year exceeds Rs. 1 lakh, then the extra amount is taxable in the form of Perquisite in the employee’s salary.
Employee’s contribution comes under Section 80C of the Income Tax Act. So, employee’s contribution towards superannuation fund is exempt from taxation if it is up to Rs.1.5 lakh in a given financial year.
There is no tax on interest received on the superannuation fund.
At the time of retirement, the employee is allowed to withdraw 1/3rd of the corpus in superannuation fund which is tax-free money. With the rest, 2/3rd of the corpus in a superannuation fund, the employee has to compulsory buy an annuity from an Insurance company.
If an employee leaves or resigns the company before attaining retirement, then he is allowed to withdraw the entire corpus in the superannuation fund in the lump sum. However, the money received in completely taxable and will be treated as “Income from Other Sources.”
Exceptions Overpayment of Superannuation Amount
According to Section 10(13), the payment of superannuation amount is not taxable:
- If the payment is made after the death of the employee to their heirs;
- If the payment is made to an employee who is incapacitated by a disability or illness or other reasons;
- 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 as refund of contributions on the death of the employee;
- Contributions made before April 1, 1962, are exempt from taxation.
Superannuation Fund Calculation
- Less than one year of service – NIL
- 1 to 2 years of service – 50% of contribution + Interest (received from fund)
- 2 to 3 years of service – 75% of Contribution + Interest (received from fund)
- More than three years of service – 100% of Contribution + Interest (received from fund)
It means that if an employee works in a company for more than three years, then the employer would contribute to 100% of the amount allocated for Superannuation. However, if an employee works for less than three years, then he/she would not get really benefited.
So, we see that Superannuation Fund is one of those schemes which make retirement of Indian working class financially stable. You go on to build a corpus which can be used for your retirement days. The best part is that the contribution is made by the employer (although it is part of CTC – Cost to Company) and even the employee can contribute to building the fund.
