What is superannuation benefit in India and how it is taxed?
Does your employer offer you superannuation benefit? Whether you know how it works and what are the tax benefits? Many employees not aware or never bothered. Because the contribution is not from their own pocket. Let us discuss more about this benefit.
Below are the features of this benefit.
- There are two types of superannuation benefits. One is called defined benefit-Under this, the benefits at retirement or pension are already known to an employee and it is fixed. Therefore, the risk of generating such defined benefit is purely on an employer (usually based on a formula linked to salary, years of service). The second one is called defined contribution-Under this, the contributions by employers is only known and fixed. However, the end benefits of retirement are not guaranteed. In such type of benefits, the risk is with an employee as he doesn’t know how much he will get at retirement.
- The contribution to this benefit is purely by an employer. So nothing will be payable from your own pocket.
- Usually an employer buys the product from insurance companies like LIC’s New Group Superannuation Cash Accumulation Plan and continues to contribute there.
- The company pays 15% of your Basic+DA. This 15% is not fixed, but a maximum limit is 15%. Therefore, based on company rules, it may change from category of employees. However, there must be same contribution for a category of employer. For example, if a manager level category offered 15% superannuation, then all managers are eligible for 15% superannuation benefit. No single manager will be allowed to receive less than or more than that mark.
- This contribution is invested by the managing company as per the guidelines set in the policy.
- Once you attain a retirement age then you have two options. One is to withdraw 1/3 of such accumulated amount and 2/3 must be converted as a pension. The second option is to buy the pension product fully without commuting anything. Any such commutation is tax-free for an employee.
- The returns of the funds may differ as each employer has the option to select the superannuation providing insurance company like LIC or ICICI. In LIC, this superannuation plan is an endowment type of product where returns will be not that much attractive. However, ICICI offers both ULIP and Endowment superannuation plans.
- If an employee resigns, then he has an option to transfer his amount to the new employer (provided both trusts are approved). If the new employer does not have superannuation scheme, then he can withdraw the amount in the account (which is taxed accordingly) or retain the amount in the fund till the retirement age.
- Once the superannuation trust is formed, then employer can’t stop contribution in the middle. The employer can stop the contribution only when the trust is wound up.
Type of annuity options available
It purely depends on the annuity provider. However, the common pension options are as below.
- Payable for life.
- Payable for life guaranteed for 5 yrs.
- Payable for life guaranteed for 10 yrs.
- Payable for life guaranteed for 15 yrs.
- Payable for life with a return of capital.
- Payable jointly on the life of husband and wife
What tax benefits of superannuation?
For taxation purposes, there are two types of superannuation. One is approved superannuation and another is not approved. This approval will be from IT Dept. The approved fund means a fund, which is approved and continues to be approved by the Commissioner in accordance with the rules set out in Part B of the Fourth Schedule of the IT Act. You can ask your employer about the status of superannuation.
- Employer’s contribution to an approved superannuation fund is allowed as expenditure deduction for business under Section 36 (1) (iv), subject to limits set out in Rule 87 and 88 of the Income-tax Rules, 1962.
- Income received by the trustees on behalf of an approved superannuation fund is exempt under Section 10 (25) (III). Usually, companies form a trust to avail tax benefits on the contributions made to the superannuation benefit.
- Employee contribution (In case employee voluntarily opted, which is only possible in case of defined contribution, but not in the case of defined benefit) for an approved superannuation fund is eligible for deduction under Section 80C, subject to the limits set in Section 80CCE.
- Any commutation of the annuity is exempt from tax.
- Benefits payable on death or injury are exempt from tax.
- The employer’s contribution in excess of Rs 100,000 is treated as a perquisite in the hands of the employee under.
- Pension or Annuity will be treated as salary income and taxed accordingly.
Note-This whole information is generic purpose. Some features may depend on the insurance company your employer opted for superannuation.