What is Superannuation Fund Benefit in India and How to calculate it?

What is Superannuation Fund Benefit in India and How to calculate itWhat 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? 

Also Read: Best Largecap Mutual Funds to invest in India

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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Suresh KP

151 comments

  • Sneha

    Hi Suresh

    Please let me know the procedure to transfer superannuation fund from LIC to NPS

    • Sneha, 1) First check with your payroll team about this transfer. It can happen only if your new employer does not have NPS and old employer superannuation needs to be transferred 2) If they confirm that you can do it, open NPS (its online you can do it in few days) 3) Share NPS details to your old employer for transfer. You need to fill transfer document which your payroll / HR can provide 4) It would take 2-3 weeks for transfer of these funds. The above steps is based on my personal experience which I did it in 2020.

  • Prem

    Hi

    I am currently an expat employee of an Indian MNC. I am going to switch jobs to a different employer in USA.

    My question is what will happen to the funds accumulated under PF and Superannuation? What options do I have to withdraw these amounts.

    Your help is much appreciated

    • Superannuation – You can move them to NPS Tier-1 or withdraw eligible amount (1/3rd) and balance take a annuity plan
      EPF – If there are no contribution for more than 2 months, you can withdraw 100%

  • Dhaval Mehta

    Hi Suresh,
    I have recently changed my job. My old company had superannuation facility and my new company does not have that facility.

    I have 2 queries please –
    1. I have received the my superannuation statement from my old company, it does not show the bifurcation of my employer’s contribution towards my superannuation. So how can I see my employer’s contribution to my superannuation? or is it even mandatory for employer to contribute towards employee’s superannuation(just like EPF)?

    2. I want my superannuation to be transferred to my EPF or NPS. And as per my knowledge, it is allowed by Govt. Of India. However, my old employer mentioned that facility to transfer to EPF or NPS is not allowed in their company. So, my query is – can they disallow the facility to transfer superannuation to NPS or EPF when Govt. of India has allowed the same?

    Appreciate your suggestion. Thank You in advance!

    • Hello Dhaval, There is nothing like employer or employee contribution in superannuation. There would be only one deposit which is anyways deducted from your CTC.
      You cannot transfer superannuation to EPF. However you can do it to NPS. I did it personally last year to my NPS account, hence I am 100% sure about it unless the superannuation fund is maintained by any private trust by your previous employer. Just with them how you can get your money if it is private trust maintained superannuation.

      • Dhaval Mehta

        Hi Suresh,

        Thank You for your reply!

        My previous organization had superannuation with DKMOnline. I am not sure whether it is private trust or govt trust.
        Also, my previous organization gave me below 2 options only, and I am not sure whether there can be any 3rd option for withdrawing my money. Please suggest on the same:

        1. Service Equal to or More Than 5years

        you have an option of withdrawing 1/3 proportion, which is subjected to tax and remaining 2/3 proportion as Annuity i.e pension depending upon the mode of annuity you select (monthly/quarterly/half yearly/yearly).
        OR

        you can opt for 100% annuity which is paid on monthly/quarterly/half yearly/yearly depending upon the mode of annuity you select.

        2. Service Less than 5years
        you have an option of withdrawing 50% proportion, which is subjected to tax and remaining 50% proportion as Annuity i.e pension, depending upon the mode of annuity you select (monthly/quarterly/half yearly/yearly).
        OR

        you can opt for 100% annuity which is paid on monthly/quarterly/half yearly/yearly depending upon the mode of annuity you select.

        Regards,
        Dhaval

        • Looks its private trust where nothing much can done from your side. Pls opt for 1/3rd withdrawal and balance take annuity option. If they provide various options in annuity, opt for annuity with joint life (you would get pension amount and in your absence, your spouse would get pension life long)

  • Steven Temioko

    What applies to the employees fund upon death, where is no nominee or beneficiary

  • Raj

    Hi Suresh,

    Recently I switched my job and in my previous company I’d superannuation as part of the CTC. I’m able to see the balance from http://www.LICindia.com, I plan to withdraw the amount during my retirement age (10+ years from now). How is the interest calculated on the accumulated corpus account? Is there any chance of my account getting de-activated after few month if there is no transaction?

    • Hello Raj, Superannuation would continue till maturity (retirement age). The returns would be minimal from any insurance company. If your new company do not have superannuation, I would recommend you shift these funds to NPS Tier-1. This way you can select appropriate scheme preference and earn high returns (6% to 14% depending on the equity component) compared to regular superannuation funds where the returns are inline with any insurance company saving scheme (4% to 5.5%)

      • Rakesh

        Hello Suresh,
        I have NPS account in KFINTECH & Superannuation in Private firm through Lic India,
        Can I transfer the amount to NPS..and How?

        Plase guide

        • NPS is always a corporate scheme and it would not be with a company. You might have a corporate NPS scheme (your personal NPS scheme linked to Kfintech) and you might be contributing every month directly through payroll deduction. If you have superannuation with LIC of India and your current employer cannot provide superannuation, you can always transfer superannuation to your corp NPS / personal NPS. If your current employer can provide superannuation benefit, this amount can straight away gets transferred to SA of new employer i.e. kfintech in your case

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