Superannuation: Meaning, Types, Retirement Scheme & Tax Exemption Benefits

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In today's busy life, we often forget to think about our retirement planning, which can affect our financial condition during the golden years of retirement. Fortunately, there is a scheme called superannuation.

In a nutshell, superannuation is a retirement plan where employers and employees contribute to creating a fund, ensuring financial stability after retirement.

This voluntary initiative is essential for building a significant corpus for the later years. With the challenges of daily life, delaying retirement planning is expected. It offers a pathway to a secure and comfortable retirement.

This blog will help you understand Superannuation meaning, its tax benefits and evaluate its inclusion in the Income Tax Act Section 80C deductions.

What is Superannuation?

Superannuation, commonly known as a company pension plan, is a retirement scheme employers offer their employees in India. It means accumulating funds in individual employee accounts, benefiting from tax exemptions until employees reach retirement age. Once they retire, they can withdraw these funds to ease their retirement planning.

Individuals can access the accumulated funds upon retirement, contributing to a financially secure future. Beyond acting as a smart retirement planning tool, the superannuation scheme aligns well with tax benefits in India, making it an essential element for financial well-being.

What are Superannuation Types?

Superannuation retirement plans come in two major types, each offering distinct benefits:

Defined Benefit Plans

As the name implies, these superannuation plans provide fixed benefits independent of an individual's contributions. The predetermined benefit is determined by various factors, such as the number of years served in the organisation, the individual's salary, and the age at which the employee starts reaping these benefits. However, this type can be a little tricky, as the responsibility of securing these benefits lies with the employer. But it also ensures financial predictability for eligible employees upon retirement as they receive a fixed amount at regular intervals, following a pre-established formula.

Defined Contribution Plans

On the other hand, defined contribution plans involve fixed contributions, and the resulting benefits are directly correlated with these contributions and market forces. This type of Superannuation retirement plan is easier to manage. Still, it places the risk on the employee, who remains to be determined about the exact amount they will receive upon retirement. Researching the current market dynamics is helpful for employees to optimise outcomes.

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Types of Annuities Available Under the Superannuation scheme

Here are the types of annuities available under the superannuation scheme:

a) Deferred Annuity or Pension

You can receive a lump sum or regular payments after a specified date. This flexibility caters to individual preferences and financial planning.

b) Payable for Life

It ensures a consistent pension income from the day of retirement until the end of the individual's life, providing financial security without worrying about outliving the pension.

c) Return of Corpus

It offers a lifelong pension, and upon the individual's demise, the remaining corpus is returned to the nominee, ensuring a financial legacy.

d) Guaranteed for a Term (5/10/15/20 Years)

It provides a guaranteed pension amount for a specified period, offering financial stability.

e) Joint Life Pension (With or Without Return of Corpus)

It extends the pension to the spouse after the individual's demise, with the option to return the remaining corpus to a chosen nominee.

f) Joint Life with 50% Pension to Spouse

It allocates half the pension to the surviving spouse, ensuring continued financial support.

g) Increasing Pension

It addresses potential rising expenses post-retirement by choosing a pension plan that gradually increases with age.

h) Commutation

It allows flexibility by enabling individuals to receive a portion of the fund as a lump sum while receiving the rest as a regular pension, offering a balanced approach to fund utilisation.

How Does Superannuation Work?

No, how does the superannuation scheme work in India? Let’s take an example to understand it better. Suppose your employer sets aside a part of your salary, up to 15%, for your retirement fund – that's superannuation. You can contribute to this fund if you want. When you retire, you get 25% tax-free; the rest 75% is invested in an annuity fund to give you a steady income.

Despite small monthly contributions, it grows into a substantial sum for post-retirement life. You can move the funds to your new employer if you change jobs. If they don't have a plan, you can take the money, keep it for later, or let it grow until you retire. It's like a savings plan for your future.

Income Tax Benefits of the Superannuation Scheme

Does the question “Is superannuation taxable?” frequently arise in your mind? A clear understanding of the tax benefits and superannuation exemption is important for employers and employees. Let's break it down:

Superannuation Tax Benefit for Employer

As an employer, you can claim deductions for contributions to the approved fund, treating them as deductible business expenses.
It is also important to note that contributions up to Rs 1 lakh remain tax-exempt, while any amount exceeding this limit becomes subject to tax implications.

Superannuation Tax Benefit for Employee

If you, as an employee, choose to make voluntary superannuation contributions, you become eligible for deductions under Section 80C, capped at Rs 1,50,000.
You can make withdrawals after a pre-declared age to avail of tax exemption.
It is also important to remember that tax-free status extends to situations where you are unable to work before retirement.
Further, benefits due to death or injury maintain their tax-free nature.
If you change jobs, the withdrawals thus made will fall under taxable "income from other sources."
Interest earnings from the superannuation fund remain tax-free.

Difference between Superannuation and Retirement

Superannuation and retirement, often used interchangeably, hold certain differences. Now, it is essential to discuss and understand the difference between superannuation and retirement.

Superannuation signifies the formal release from service upon reaching a predetermined age, generally around 58-60 years in India. On the other hand, retirement means leaving the workforce, generally after reaching a specific age or driven by choice or necessity. While retirement encapsulates the broader spectrum, superannuation precisely pinpoints age-triggered exits.

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FAQs About Superannuation

1.) Is superannuation differ from regular retirement savings?

Yes, superannuation plans offer secure benefits for retirement. Unlike regular retirement plans tied to market changes, superannuation benefits remain unaffected, ensuring a stable outcome for eligible employees.

2.) Is superannuation mandatory for employees?

No, superannuation is not mandatory for the employees. Your employer contributes 15% of your basic salary, and while it's optional for you to contribute, you have the choice.

3.) Where can one find more information for superannuation schemes?

You can visit the official government website of the pensioners' portal or contact your bank for more information on superannuation.

4.) How can individuals optimise their superannuation benefits for a secure and comfortable retirement?

Here’s what all you can do to optimise your superannuation benefits:
Maximise personal contributions to the superannuation fund.
Choose appropriate investment options based on risk tolerance and financial goals after retirement.
Regularly review and adjust the superannuation fund to align with changing circumstances.
Stay informed about updates and changes in superannuation regulations.

5.) Is it possible to access superannuation funds before retirement, and under what circumstances?

Yes, you can access your superannuation funds before retirement, when facing a financial hardship, or a medical emergency.

6.) Are there any risks associated with superannuation investments, and how can one mitigate these risks effectively?

Superannuation is generally considered to be a safe investment. However, certain risks, such as economic conditions and investment decisions, may impact returns. To mitigate risks, diversify your investments, and stay updated about market trends.

Superannuation: Meaning, How It Works & Its Benefits