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Superannuation is a retirement planning scheme in which employers and employees contribute to building a fund that provides income for the employee post his retirement. It is a voluntary scheme that can help you build a corpus for your laters years.
The hustle and bustle of daily life often leads us to procrastinate our retirement planning, which is critical to ensure a stress-free and financially stable life post-retirement. Thankfully, schemes like Superannuation help you plan a secure and comfortable retirement.
Superannuation refers to a scheme offered by employers to act as a financial safety net once you retire. Simply put, it is a pension plan in which both employee and employer make contributions to build a fund that can be used by the employee post his retirement. An important thing to note about the superannuation scheme is that it is tax-exempt.
This blog will discuss superannuation meaning, superannuation tax* benefits, and whether or not it is covered under Income Tax Act Section 80C deductions. Read on!
Superannuation Retirement Meaning
A superannuation scheme refers to a pension scheme granted by a company or employer to its employees for their welfare. Also known as a company pension plan, superannuation involves accumulating funds in employees’ accounts until their retirement without any tax implementation. Once they retire, they can withdraw this fund to ensure a secure financial future.
In simple terms, superannuation is a retirement pension scheme that helps you plan your future while also enjoying tax exemptions.
How Does the Superannuation Scheme Work?
In this pension plan, the employer contributes a maximum of 15% of your base salary to the superannuation fund. You may or may not contribute to this fund; it is up to you. If you choose to contribute, the amount will be deducted from your basic salary.
When you retire, you can withdraw 25% of this fund, which is exempted from taxation. Further, the remaining 75% will be invested in an annuity fund to ensure a smooth and regular flow of income post your retirement.
Although the monthly contribution towards the superannuation scheme is small, it helps in building a substantial balance enough to support you financially after retirement.
Moreover, if you switch jobs, you have the option to transfer your superannuation fund to your new employer. In case your new company does not grant a superannuation scheme, you can withdraw the accumulated account or leave it as it is until your retirement.
Superannuation Types
Based on investments and gains, the superannuation types are as follows:
Defined Benefits Plan: It is a fixed superannuation plan in which the benefits are already fixed irrespective of the amount of contribution of the plan. Basically, the benefits of this plan are pre-declared on the basis of factors like your time in the firm, your salary, the age at which you will start receiving the superannuation benefits, and so on.
It is a complex plan, and the decision regarding the benefits lies in the hands of your employer. At the time of your retirement, you will receive a predetermined fixed amount at regular intervals.
Defined Contributions Plan: The defined contributions plan is just opposite to the defined benefits scheme discussed above. It has fixed contributions, and the benefits are directly proportional to those contributions. It is relatively easy to manage as your employer contributes a fixed amount towards your superannuation fund.
Common Types of Annuities Available Under Superannuation Scheme
Annuity refers to a financial product offering periodic payments to the employee after retirement for their contribution to the superannuation scheme.
Below are the types of annuity options available with superannuation plans:
Payable for life
Payable for life with a ROC (Return-on-Capital)
Payable jointly on the life of an employee and their spouse
Payable for life at regular fixed intervals of 5 years, 10 years, or 15 years
Tax Benefits of the Superannuation Scheme
Now that you understand the meaning of the superannuation retirement and superannuation types, let us move on to the superannuation tax benefit list for better understanding.
Before moving further, note that the superannuation scheme offers benefits for both employers and employees. However, these benefits are subject to approval from the Commissioner of Income Tax under the rules laid in Part B of the Fourth Schedule of the Income Tax Act.
Superannuation Tax Benefit for Employer
The employer’s contribution towards the approved superannuation fund is a deductible business expense. Further, contribution up to ₹1 lakh to the superannuation fund is tax-exempt. Note that any amount above ₹1 lakh is subject to tax implementations.
Superannuation Tax Benefit for Employee
If an employee approves the superannuation fund voluntarily, then it is eligible for deductions under Section 80C of the IT Act. Under this act, the limit of deductions is set to ₹1,50,000 for the employee.
The superannuation fund payment granted to the employee after a pre-declared age is exempted from tax implementation.
Superannuation will be tax-free if the employee becomes unable to work for any reason before retirement.
The superannuation benefits received on the death or injury of an employee are tax-free.
If the employee withdraws the superannuation amount due to job change, the amount will be taxable and marked under “income from other sources.”
Interest generated on the superannuation fund is tax-free.
Final Thoughts
Superannuation is not merely a pension scheme; it is an important financial concept that allows you to plan a secure and stress-free retirement. It ensures your financial stability after completing the job and will provide a smooth flow of regular income to cover your expenses in the absence of a job.
Not just that, the superannuation scheme also lets you optimise your tax savings as this fund is tax-free up to a certain limit under IT Act Section 80C.
We have covered the detailed superannuation fund meaning in this blog, along with its eligibility and taxability. We hope it helps.
