Superannuation and Its Concept

What is Superannuation?

 

Employers often pay retirement benefits to their employees either due to statutory mandate or as a part of employee wellness schemes for boosting productivity, morale and retention. These retirement benefits are paid when the employee retires from active employment. One such retirement benefit paid to employees is called superannuation benefit¹.

Thus, superannuation meaning can be defined as a retirement benefit paid to employees1. Employers might create a superannuation fund for paying the retirement benefit or buy a group superannuation scheme from an insurance company for the same¹.

 

How Does Superannuation Work?

 

If the employer creates a superannuation fund itself, it contributes to the fund regularly to build it up1. On the other hand, if the employer buys a group superannuation scheme, it pays premiums towards the scheme.

The contribution to the superannuation fund or scheme depends on the superannuation benefit selected by the employer1. Though the employer contributes to the superannuation fund, it forms a part of the employees’ Cost to Company (CTC)¹.

If employees want, they can also contribute to their superannuation fund voluntarily1. The superannuation fund is invested and keeps earning returns till the employee retires. On retirement, the employee can withdraw (commute) up to one-third part of the accumulated corpus and use the rest to receive regular annuity payouts¹.

 

Types of Superannuation

 

There are two types of superannuation1. They are as follows –

1. Defined benefit plan

Under this plan, the benefit payable after retirement is fixed. This benefit depends on the number of years of service, salary of the employee, age at which the benefit is availed of, etc. After retirement, the employee receives the fixed benefit as defined under the plan. Depending on the benefit defined, the contribution to the scheme is worked out.

2. Defined contribution plan

Under this plan, the contribution to the superannuation fund is fixed. Depending on this contribution and the returns it earns till the employee retires, the benefit payable upon retirement is determined.

 

Types of Annuity Options Available in Superannuation

 

After retirement, there are different types of annuity payout options that the employee might choose from as a part of his superannuation benefit. Some of these options include the following¹ –

1. Pension payable for life

2. Pension payable for a guaranteed period of 5, 10, or 15 years

3. Pension payable for life and return of capital on the death of the annuitant

4. Pension payable on the joint lives of husband and wife where the payment continues till the last surviving annuitant is alive

 

Benefits of Superannuation

 

Some of the benefits of superannuation are as follows –

1. Helps employees financially after retirement

After the employee retires, he might not have an active source of income while his expenses do not stop. In such cases, the annuity payouts from the superannuation scheme give employees much-needed income after retirement and help them take care of their financial needs.

2. Helps employers retain employees

Employers offering superannuation schemes to employees can attract and retain good talent and also promote productivity at the workplace.

3. Tax benefits for employer & employee

The superannuation scheme is also tax-saving in nature. If the employer pays the contribution to the superannuation fund, the approved contribution made is allowed as a deductible business expense for calculating taxable profits1. This helps reduce the tax liability of the business. Moreover, in the case of self-managed superannuation trusts, the income received from approved superannuation funds is allowed as tax-free income¹.

In the case of employees’ contributions to the superannuation fund, the contributions are treated as tax-deductible investments under Section 80C up to Rs.1.5 lakhs1 under old tax regime. The benefit received from the superannuation fund on injury or death is also tax-free¹.

The commutation of annuity on retirement is also allowed as a tax-free income1. Lastly, if the employer contributes to the superannuation scheme on behalf of the employee, any amount in excess of Rs. 1.50 lakhs is taxable as perquisite in the hands of employee. The budget 2020 announced a combined limit and now taxable perquisite will include the amount in excess of Rs. 7.50 lakhs contributed by employer towards PF, NPS, Superannuation along with annual accretion by way of interest on such contributions.

 

Superannuation from the employer and employee perspective

 

The superannuation scheme is quite beneficial both from the employer’s and the employee’s perspectives. Have a look at how –

Benefits of superannuation for employers –

Some of the benefits for employers opting for the superannuation scheme are as follows² –

1. Retention of key employees

2. Attract good talent for the organisation

3. Provide tax-free perquisites to employees

4. Enjoy tax benefits on the contribution made to the superannuation fund

5. If a good superannuation scheme is selected, employers can earn good returns on the accumulated corpus which helps in enhancing the retirement benefits paid to employees

Benefits of superannuation for employees -

For employees, some of the benefits of the superannuation scheme are as follows² –

1. Financial assistance in the form of regular income after retirement

2. Choice of different annuity payout options to choose from

3. The joint-life annuity provides financial security to the surviving spouse if the primary annuitant passes away

4. Tax benefits on the contribution and the commuted part of the superannuation fund

 

Superannuation Vs. Other Plans

 

The superannuation scheme is a retirement-oriented scheme opted by employers to provide financial assistance to employees after their retirement. Other group insurance plans cater to other needs of employers and employees. For instance, the group gratuity plan takes care of the statutory gratuity payment by employers while the group term insurance plan provides employees financial security against the risk of premature demise.

So, superannuation schemes are different from other group insurance plans as they cater to a particular need of employers and employees.

 

Conclusion

 

If you are a salaried employee, understand the superannuation meaning and check your salary structure for the superannuation benefit offered by the employer. You can add to your superannuation fund to enhance it and secure higher retirement payouts. Use the superannuation benefit after retirement and create a source of regular income to take care of your financial needs in your golden years.

 

FAQs

 

1. Can I make additional contributions to my superannuation?

Yes, employees are allowed to make additional contributions to their superannuation fund1. Such contribution is voluntary and not mandatory.

2. When can I access my superannuation?

You can access your superannuation when you reach the age specified by the employer or under the superannuation terms and conditions³. This age can be retirement age or any age before retirement.

Reference

1. https://cleartax.in/s/superannuation

2. https://nios.ac.in/media/documents/vocinsservices/m3-f6.pdf (page no 92 and 93)

3. https://www.indiafilings.com/learn/superannuation/

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