What is Superannuation Fund Benefit in India and How to calculate it?
When we think of retirement benefits, Employees Provident Fund (EPF) Public Provident Fund (PPF), Gratuity and National Pension Scheme (NPS) are the few things that strike our mind. Very few people know that there is another benefit plan existing known as the superannuation benefit. In order to plan your retirement in a better way, it is very important to know your superannuation benefits. It is an organizational pension program created by a company for the benefit of its employees. In other words, it is referred to as a company pension plan. What is Superannuation Fund Benefit all about? Who is eligible to get Super Annuation Benefit? How does Superannuation scheme work exactly? How Superannuation Calculation is done in 2020? What are various income tax benefits available in Superannuation scheme in 2020?
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What is Superannuation in India?
Today, most companies offer a superannuation scheme, but many of might have less knowledge about superannuation act in India. Superannuation fund meaning in simple terms is a kind of retirement benefit that is offered to you by your employer. Your employer makes a contribution every year on your behalf towards the group superannuation policy held by the employer. Usually, the companies take Superannuation Plans from any of the approved insurance companies like LIC or ICICI approved insurance companies and contributes therein. The returns of the superannuation fund may differ according to the company providing the annuation insurance.
The employees who have been contributing to the superannuation scheme of their company during their employment; at the time of retirement or resignation have the option of buying a superannuation-linked pension from any insurance company.
What are various types of Superannuation Benefit?
There are two types of super-annuation benefits:
1) Defined benefit plans
The benefits to be received at the retirement are already known to the employee and it is fixed on the basis of their rank service and final salary. So, the risk of generating such benefits is entirely on the employer.
2) Defined contribution plans
These schemes are better to manage as the employee and employer directly correlate it with the contributions made. The scheme defines the contribution of both and leaves the outcome to the market forces. Most of the plans existing today are defined contribution plans. Here, the risk factor is attached to the employee, as he is not aware of the amount he is going to receive at the time of retirement.
How does Superannuation scheme work exactly?
The companies open the superannuation benefit fund with any of the approved agencies like ICICI, LIC etc. Employer needs to contribute to maximum of 15% of the salary to superannuation funds on behalf of the employee. The companies are making this part of the salary structure itself i.e. part of CTC. There is no specific contribution from employees like it is for EPF. Upon retirement or resignation from his job, his employer to either withdraw his entire superannuation fund or choose the annuity option and gives the employee.
How is Superannuation Benefit calculated?
The superannuation calculation on the basis of following points.
1) Less than 1 year of service – NIL.
2) 1 to 2 years of service – 50% of contribution + interest received from fund.
3) 2 to 3 years of service – 75% of contribution + interest received from fund.
4) 3+ years of service-100% of contribution + interest received from fund.
The above table reveals that if the employee wants to benefit himself from the superannuation fund, he needs to be associated with the company for more than 3 years. Then only, the employer would contribute to 100% of the amount allocated for superannuation. If he works for less than 3 years, he would not be benefited though it is a part of CTC structure.
Though it looks superannuation calculation is confusing, if you can understand the basics, it would be easier.
What happens to Superannuation scheme if employee resign from a company?
If an employee resigns from a company and moves to another company, he can transfer his superannuation fund to the new company if the new company is having approved superannuation fund. Superannuation withdrawal on resignation in India can happen only in case, new company does not provide this facility. In such case employee can withdraw the amount with necessary taxes applicable or retain the amount in the fund till the retirement.
What are various income tax benefits available in Superannuation scheme?
For the purpose of taxation, there are two types of superannuation. One is approved and the other is not approved. This approval is taken from the IT Department. The approved fund means that the fund has been approved by the Commissioner in accordance with the set rules. The employee needs to ask his/her employer about the category of the fund.
From the employee’s point of view, here are the tax benefits:
1) Employee contribution (possible in the case of defined contribution and not defined benefit) for an approved superannuation fund is eligible for deduction u/s 80C, subject to the limit set in Section 80CCE.
2) Benefits payable on death or injury are tax-exempted.
3) Pension or annuity will be treated as salary income and taxed accordingly.
4) At the time of change of job, any amount withdrawn is taxable under the head ‘income form other sources’.
5) Interest from a superannuation fund is tax-free.
6) On retirement, 1/3 of the commuted fund is fully exempt from tax and the remaining amount if transferred to an annuity is tax-free and if the amount is withdrawn, it is taxable in the hands of the employee.
From the employer’s point of view
1) The contribution of employer to the fund is allowed as expenditure deduction for business u/s 36(1)(iv) subject to certain limits of the Income Tax Act 1962.
2) Income received by the trustees on behalf of an approved superannuation fund is exempt u/s 10(25)(III).
What happens to your Superannuation scheme when you reach retirement age?
Once the retirement age is attained, the employee has two options-
Option 1 – To withdraw 1/3 of the accumulated fund and the remaining 2/3 be converted into the pension.
Option 2 – To buy the pension product for the entire amount without withdrawing anything. Such commutation is tax-free for an employee.
For instance – X retires with a superannuation fund of Rs 15 lakh. Then, he may withdraw Rs. 5 lakh from it (1/3 of Rs. 15 lakh). It is totally tax-exempt. The remaining Rs. 10 lakh is fully taxable if he withdraws and if he buys annuity from this amount, it is tax-exempt. He can use the entire amount of Rs. 15 lakh for buying annuities.
Also Read: How to check if you are eligible for Gratuity from your company?
What are various annuity options available in Superannuation?
At the time of retirement, post-retirement annuities can be bought from any life insurance Company. The most common options available to the employee are –
- Payable for life
- Payable for life guaranteed for 5 years or 10 years or 15 years
- Payable for life with a return of capital
- Payable jointly on the life of husband and wife
Conclusion: Superannuation scheme is an excellent for the working class of India to make their retirement more financially stable. The employees are much more secured with these schemes. Another benefit from such schemes is that the employee is prompted to be associated with an organization for a longer term as such schemes provide more benefits to them rather than switching jobs more frequently.
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Hi,
I had completed 9 years in my organization & here the superannuation is linked with LIC of India. Can I withdraw the total Superannuation amount.
Regards,
M. Will
Hello Max, There are few T&C to withdraw your Superannuation. Check this article which has all these guidelines. https://myinvestmentideas.com/2020/10/how-to-withdraw-superannuation-fund-in-india/
Hi,
I am 57+ years I was laid off on 30th. Oct 2020. I will complete 58 years on July 2021.
In case I withdraw my LIC superannuation fund of Rs.15 lacs in April 2021 i.e in FY 2021-22 . what will be my tax liability on superannuation fund . Weather entire 15 lacs will be treated as my income or only 10 lacs,
Whether I will be eligible for tax exemption under section section 6 ( house rent ) , 80C and 80CCD (1B) for the year 2021-22 .
Hello Navneet, Superannuation maturity amount is completely taxable. If you receive such amount you need to pay income tax as per income tax slab applicable to you. The best way to avoid is to take annuity plan from same LIC. The pension payable every year is treated as income and you need to pay income tax on this. e.g. Rs 15 L annuity can give you Rs 1 Lakh pension per annum (approx and would vary with option you might choose). You may need to pay income tax based on your total taxable income. Regd House rent (HRA) is only for salaried individuals. You can claim HRA to the extent it is indicated in your form-16 for 20-21. For FY21-22, you would not be eligible to claim HRA. However, the exemptions u/s 80c and 80CCD 1b are available for all individuals (salaried + others)
Sir
My Company went into closure on Oct 2017. My superannuation fund is still lying with HDFC life assurance. On contacting them they say now no trustee or signatory is liable to take care of and not replying over mails and phones. In this context what should I do ?
Hello Rupa, It is the duty of the HDFC Life Assurance to serve customers of Superannuation fund where their company has invested. Pls raise complaint against such insurance company with the details at IRDA Website. Pls keep all documentation of communication ready before raise the request. https://igms.irda.gov.in/loginph.aspx
Hi , I have done withdrawal of Supperannuation fund upon resignation from the company , I have recieved 1/3 of the Sum from the company for Supperannuation fund withdrawal and 2/3 is invested in Annuity , May i know what are taxable implications for the withdrawal? If i have to declare 1/3 of the amount recieved in ITR wgich section under Income from Other sources i should use to declare the amount?
Thanks and Regards,
Gitesh
Hello Gitesh, As indicated in the article, at the time of change of job (or even during resignation), any amount withdrawn is taxable amd should be shown under head ‘income form other sources’ and pay necessary tax
Thanks for reply , Can u indicate which section of ITR i have to show this amount under Income from other sources ? My resident status is Non-resident and i am filling ITR-2
Hello Gitesh, There is no seperate section for showing Superannuation in ITR. You can go to ITR –> Income from other sources –> 1) Gross income chargeable at normal rates –> 1) e) – Any other income –> Under this add a row for Superannuation and indicate this amount. The income tax would be charged at normal rates and not specific rates.
Sir,i retired July 31st,2020.At that time my super annuation fund was 10lacks thirty thousand rupees.LIC fixed 4700 rupees pention.please advise.
Hello Satyanarayana, Pension amount would depend on pension scheme chosen by you on retirement. Pls reach out to LIC customer care if you have not opted on your own to provide options (not sure whether you can change this now)