Must Knows

Superannuation: Meaning, purpose and benefits

[] Superannuation is defined as retirement due to age or infirmity.

Majority of firms give their workers a selection of retirement benefits. Provident fund, gratuity, the National Pension System are examples of such retirement benefits. The provision of a superannuation benefit is among the retirement benefits provided by businesses to their workers.

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It is possible that many people are unaware that they have received a superannuation benefit since they do not have to pay for it themselves. Some may be ignorant of their retirement superannuation.

What is the purpose of Superannuation?

Superannuation is defined as retirement due to age or infirmity. Superannuation refers to an organisational pension plan established by an employer for providing financial security for their workforce in retirement. A corporate pension plan is another name for this kind of arrangement.

Superannuation benefit types  

In India, superannuation benefits are broken down according to the following categories, which are determined by the kind of investment and the specific advantages it provides:

Defined benefit plans

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This is characterised by a benefit obtained regardless of the amount of money contributed to the plan. The benefit that is predetermined is calculated using many criteria, including the number of years a person has spent working for the company, their current income, and their age when they first become eligible to receive the benefit. Every qualifying employee who has reached the age of retirement will receive a set payment, at frequent intervals.

Defined contribution plan

The defined contribution plan is the counterpart of the defined benefit plan. A defined contribution strategy has a predetermined contribution amount, and the return is proportionate to the contribution and the competitive dynamics. This sort of retirement benefit is less complicated to administer, but as the employee, you are responsible for bearing the risk because you do not know how much money you will get once you retire.

How does superannuation function?

The employer makes a contribution to the superannuation scheme that he maintains, for or on behalf of the people who work for him. Superannuation funds may be managed by an organisation’s own trust, can be established with one of the recognised insurance firms, purchased from ICICI’s Endowment superannuation plans, or LIC’s New Group Superannuation Cash Accumulation Plan.

The employee’s basic salary and dearness allowance are subject to the employer’s contribution, a predetermined proportion (up to a maximum of 15%), and that payment must be given to a certain group of workers at the same predetermined percentage. Superannuation should ideally be included in the company’s CTC.

In the event of defined contribution plans, employees have the option of contributing an extra amount to the fund of their will. At the end of the tenure, the employee has the option of withdrawing up to one-third of the total accumulated value and converting the remainder into a routine pension. The remaining balance is placed in the annuity fund for the employee to receive a rate of return on the annuity at predetermined intervals.

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In the event that the worker decides to switch employers, they have the option of transferring the accumulated superannuation to the new company. If the new company does not provide a superannuation plan, the worker has the option of either taking the money out of the fund immediately or keeping it there until retirement and then taking it out in the manner described before.

Options available for annuities

The following are examples of common types of annuities: 

  • Lifelong payment
  • Payable for life with a 5-year/10-year/15-year guarantee.
  • Permanently payable with a financial return
  • Paid jointly on the lives of the spouses

Income tax benefits

Employers and employees benefit from superannuation since it reduces their taxable income. The Commissioner of Income Tax must provide this permission in line with the regulations set forth in Part B of the Fourth Schedule of the IT Act.

For the employer

Contributions to an authorised superannuation fund are deductible business expenses, and any income earned by self-managed partnerships of an authorised superannuation fund is likewise exempt.

For the employee

  1. The payment that an employee makes to a superannuation fund that has been authorised by the government is tax-deductible under Section 80C, up to a total maximum of Rs 150,000.
  2. Any money that an employee takes out of their retirement plan while switching jobs is subject to taxation under the category of  “Income from other sources”.
  3. There is no tax payable on any benefit paid out by a superannuation fund in the event of death or injury.
  4. The interest received out of a superannuation fund is exempt from taxation.
  5. At the time of retirement, one-third of the remitted fund is granted a tax-free exemption in its entirety; the remaining amount, if converted to an annuity, is granted the same tax-free exemption. However, if the sum is withdrawn, it is subject to taxation in the disposal of the employee. 

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Category: Must Knows

Debora Berti

Università degli Studi di Firenze, IT

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