Group Superannuation Scheme for Employees - Types and Benefits

Majority of the corporate organisations in India provide retirement benefits to their employees as part of their employee benefit program. This not only helps the employees get a pension after retirement but also allows the employers to win the employees’ trust and retain them for a longer period.The retirement benefits offered to employees generally include PF ( provident fund ), gratuity, NPS (National Pension System), etc. However, another common employee retirement benefit is the group superannuation benefit.Many employees tend to ignore the retirement benefit. In fact, most of the employees may not be even aware of the benefits provided to them by their employees as the contributions to the retirement funds do not go from their pocket. In fact, some research suggests that most of the Indian employees have no clue about the superannuation amount that they are entitled to get when they retire from employment.
If you too are not aware of superannuation benefits, this write-up will be useful for you as we discussed different aspects of group superannuation schemes.

Superannuation or superannuate literally mean ‘to retire’ due to old age or infirmity. A group superannuation benefit is the retirement offered to all employees in an organisation by the employer. It is an organisational pension program that is specially created by a company for the employees’ benefit, and it is mostly commonly referred to as a company pension plan.

In India, group superannuation benefit is broadly classified in two types based on the investment and the benefits that the scheme offers.

Defined benefit plan

As the name suggests itself, is a type of group superannuation scheme where the benefits in terms of pension you receive is fixed irrespective of your contribution to the plan. The predetermined amount is fixed based on several factors like the number of years you have served in the organisation, your annual salary, the age at which you start getting the benefit, i.e., the number of years left before you retire, etc. Once you retire or reach the retirement age, you get a fixed amount as pension periodically.

Defined contribution plan

This type of group superannuation scheme is exactly the opposite of a defined benefit plan. While in a defined benefit plan, you get a pre-determined and fixed benefit, in a defined contribution plan, the benefits you get are directly proportional to the contributions you make and the market condition.One of the noteworthy features of this type of group superannuation scheme is that as an employee you would know the exact amount you may receive after retirement.

In a group superannuation scheme, the employer contributes to the policy they purchase on behalf of all the employees. Generally, the organisations manage the superannuation funds on their own or they open a superannuation benefit fund with the approved insurance companies. Some of the organisations prefer buying superannuation policies from reputed insurance companies like LIC, Aditya Birla Capital or ICICI.In a group superannuation plan, the employer contributes a fixed percentage of the employees’ basic salary and dearness allowance. Generally, the maximum contribution that the employers make towards employee group superannuation plans is 15% of basic pay and dearness allowance components of the employees’ salary. Although the contributions towards group superannuation is made by the employer, it is considered as part of the employee’s CTC.Another significant feature of the group superannuation program is that as an employee, you have the option to voluntarily contribute an additional amount over and above the employer’s contribution to the superannuation fund. However, such contribution is allowed only if the employer holds a defined contribution plan.When you retire, you can withdraw up to one-third of the accumulated corpus in lump sum and use the remaining amount to draw a pension. Thus, you can get a steady income stream even after retirement and you can manage your expenses more efficiently.If you switch jobs, you can transfer the superannuation amount to the new employer and continue to accumulate corpus for your future needs. However, if the new employer does not have a superannuation plan, you can either withdraw the accumulated amount immediately or retain the same amount in the fund until you reach the retirement age and withdraw later.

Superannuation plans provide income tax benefits to both employers and the employee. You must know that the tax benefits on such schemes are restricted to the approved superannuation fund and the employers must obtain approval from the Commissioner of Income Tax as per the rules set in the Part B of the Fourth Schedule of the Income Tax Act.

For employers

The contributions made by the employer towards the superannuation fund and approved by the Income Tax department is considered as tax deductible for the organisation. Also, any income received by the self-managed trust of the superannuation fund is fully tax-exempt.

For employees

If you voluntarily contribute towards the approved superannuation fund, the amount is eligible for tax deduction up to a maximum limit of Rs. 1.5 lakhs in a financial year under Section 80C. This tax deduction is inclusive of the overall deductions under the section.If you withdraw any amount from your superannuation fund while you switch jobs, the amount may be considered as an income, and it will be added to your total annual income under the ‘income from other sources’ and taxed as per your usual tax bracket.Any benefit that you may receive from the superannuation fund upon death or injury are fully tax-free.The interest you may earn from the superannuation fund is tax free.After you retire, you can withdraw one-third portion of the funds in your superannuation account without paying any taxes on the same.The employer’s contribution to your superannuation fund up to Rs. 1.5 lakhs are fully exempt for you. However, if the contribution amount exceeds the Rs. 1.5 lakhs limit, the additional amount will be taxable in your hands.

Group Superannuation Scheme is meant for the employees’ benefits. It is an excellent scheme that provides the much-needed financial support in your old age after retirement. You can use the accumulated corpus in the fund to draw pension and meet your regular expenses. It can be a supplementary income during your golden years.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.