Explained: What is a superannuation fund?

Indian companies offer various retirement benefits to their employees. This can either be due to a statutory mandate or voluntarily to simply retain their workforce for a longer duration. These retirement benefits include provident fund, gratuity, National Pension System (NPS), etc. A superannuation fund is one such organisational pension plan provided to employees.

While it isn’t an obligation but many employers can offer this additional benefit to employers where the former contributes 15% of your basic salary to this fund. Sometimes people remain ignorant of various retirement funds being offered by the companies. But considering the huge corpus that’s collected at the time of maturity, it becomes imperative to understand these funds.

What is a superannuation fund?

A superannuation fund, often known as the company’s pension plan, can be of two kinds basis the investment type and benefits offered – defined benefit plan and defined contribution plan. The former is a pre-determined benefit plan while the latter is a pre-determined contribution plan.

In the case of a defined benefit plan, returns are based on factors like the number of service years in the company, your salary, and the age at which the employee will start reaping the benefit. After retirement, all eligible ex-employees receive a fixed amount at regular intervals. On the other hand, a defined contribution plan has a fixed contribution, and benefit is linked to it. Here, the risk is employee-oriented as he does not know how much h/she will receive at retirement.

How does it work?

Employers either manage superannuation fund via own trusts or open a new fund from insurance companies like LIC’s New Group Superannuation Cash Accumulation Plan or ICICI’s Endowment superannuation plans among others.

The company is liable to contribute a fixed percentage (up to a maximum of 15%) of employees’ basic pay and dearness allowance to the superannuation fund on behalf of those employees who opt for this policy. While the contribution is made by your organisation, superannuation is ideally considered part of Cost To Company (CTC).

Moreover, employees can voluntarily contribute to this fund under the defined contribution plan as well. Post-retirement, one can withdraw up to 1/3rd of the corpus and convert the balance amount into a regular pension. It can also be kept in an annuity fund for receiving returns at a time interval of your choice.

Tax benefits on superannuation funds?

Superannuation funds provide income tax benefits to both the employer and employee. But only an approved superannuation fund is under the purview of such tax benefits. This approval is required to be taken from the Commissioner of Income Tax as per the rules set out in Part B of the Fourth Schedule of the I-T Act.

For employers, any contribution to an approved superannuation fund comes under deductible business expense while the income received by self-managed trusts of an approved superannuation fund is also exempted. Meanwhile, an employee’s contribution to such approved funds is deductible under Section 80C subject to an overall limit of Rs 1,50,000.

Besides, if you decide to change the job, there is an option to transfer your existing superannuation amount to the new employer. However, if the new employer doesn’t have a superannuation scheme, you can either withdraw the balance amount or might as well retain it till retirement. Now any amount withdrawn by the employee during job change is taxable under the head ‘Income from other sources. Meanwhile, any benefit (in case of death or injury) or interest received from your superannuation fund remains tax-free.

What’s new

The Union Budget 2020 announced a combined upper limit of Rs 7.5 lakh for the employer’s contribution to NPS, RPF and superannuation fund in a financial year. Therefore, any contribution made by the employer above the limit of Rs 7.5 lakh will be taxable as perquisites in the hand of the employee.