Superannuation Scheme - How Does It Work, Types and Benefits

In India, it is a statutory obligation for all organisations to provide their employees with a retirement scheme that can provide a regular pension. Some large and reputed firms can even provide higher than the mandatory pension benefits for better workforce retention or employee welfare.While employees can be conscious about their salary and other remunerations while in service, most of them are ignorant of the retirement schemes offered by their employer and the subsequent benefits that they are entitled to.

Superannuation simply means retirement. A superannuation scheme is a retirement-benefit scheme offered by the employer to its workforce to provide them with the benefit of regular pension after they retire.

The superannuation plans in India can be broadly classified into two types depending upon the investments and benefits they offer.

• Salary
• Age of retirement that is either natural or voluntary
• Number of years in service

• Defined-Benefit Plans Defined-benefit plans promise to provide a fixed amount of pension to the pensioner after retirement irrespective of the fund’s performance or the pensioner’s contribution to the plan.The benefits or the pension amount in such plans are generally determined by the following attributes of the employee.
• The employees’ provident fund is the prime example of a defined-benefit plan.
• Defined-Contribution Plans These plans do not offer any fixed or pre-determined annuity benefits. Instead, subscribers contribute a fixed amount into a defined-contribution plan, and the annuity benefits are provided as per the fund's performance.Therefore, employees can never know beforehand that how much pension they will receive after retirement. However, these plans are actively managed with a greater level of transparency.Furthermore, a portion of the retirement fund is invested in equities and other market-linked instruments that have the potential to generate relatively higher returns in the long run.
  Moreover, subscribers have the option to actively control the asset allocation in such plans. The National Pension Scheme (NPS), for example, is a defined-contribution pension plan.

While some organisations prefer to manage their own retirement fund, many prefer to outsource the fund to any of the insurance funds approved by the PFRDA (Pension Fund Regulatory and Development Authority).The fixed percentage of the basic pay and dearness allowance is deducted from the employee’s salary for contribution to the annuity fund. The employer contributes an equal amount up to a maximum of 15 per cent of the basic pay.In the case of defined-contribution plans like NPS,

• The employee can voluntarily increase contribution to the pension fund for building a higher retirement corpus.
• The retired person must invest 40 per cent of retirement corpus in an annuity plan that can provide a regular pension.

The superannuation amount can be transferred to the fund of the new employer if an employee changes the company mid-way. Alternatively, the employee can opt to either withdraw the retirement fund amount or hold it till retirement.

Most superannuation plans commonly offer the following four annuity options-

• Lifetime pension
• Guaranteed pension for a specific period like 5,10, or 15 years
• Lifetime pension with a return of purchase price to the nominee after the death of the pensioner
• Pension for either of the surviving spouse

Both, employer and the employee can avail different tax benefits on contribution towards a retirement fund, provided the fund is approved for income tax exemptions.

• The employee can claim a maximum tax exemption of Rs 1,50,000.00 under Section 80C for the amount contributed to the superannuation fund. The exemption is allowed under the old tax regime.
• Any accidental or death benefit received from a superannuation fund is tax-free.
• Interest earned on a retirement fund is also tax-free.

• Employer Under Section 36 of the Income Tax Act, the employer can claim income tax deduction under the business expenses for the amount contributed to a superannuation fund.
• Employee

Note:-

1. Amount withdrawn when changing the job is taxable because it is considered "Income from other sources".
2. Regular pension received by pensioners is taxable depending upon their total annual income.

• The Existing Provisions Any contribution made on behalf of the employee by the employer to a recognised provident fund, exceeding 12% of the employee's salary comprising basic pay and dearness allowance is taxable.Any contribution made by an employer on behalf of an employee to a recognised provident fund exceeding 12% of the employee's salary comprising basic pay and dearness allowance is taxable.
• The Updated Provisions On February 1, 2020, the annual budget announcement resulted in a revision to the amount that employers are allowed to deduct from their employees' base salaries for contributions to retirement savings accounts.Now any contribution made by the employer over Rs 7.5 lakhs will be considered a part of the employee's privilege income and, hence, taxable to the employee. As a consequence, any interest or dividend accumulated during that same financial year on these retirement plans will also be taxed to the employee.

A pensioner who has no other source of income need not worry much about taxation changes. This is because 60 per cent of the retirement fund is already tax-free. Regular pension received from the remaining 40 per cent needs to be substantially high to attract income tax liabilities, if any.

Rising inflation and healthcare costs, along with increased longevity, demands a robust pension plan that can financially support your post-retirement needs.New age market-linked superannuation schemes like NPS, along with disciplined investing, are worth considering as they can help you achieve financial freedom in 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.