How does the superannuation scheme work?
In this pension plan, your employer contributes up to 15% of your basic salary to your superannuation fund.
Upon retirement, you can withdraw 25% of your fund which are non-taxable. The remaining 75% will get invested in an annuity, providing you with a guaranteed income stream for the rest of your life.
Even small monthly contributions add up over time, creating a significant retirement fund. Plus, if you change jobs, you can transfer your superannuation to your new employer or keep it invested until retirement.
Additional read: Post Office Saving Schemes
Types of superannuation plans
Superannuation plans vary based on factors like contribution structure, investment options, and payout options. Common types include:
1. Defined benefit funds
Defined benefit funds guarantee you a specific retirement income. It is calculated using a formula based on factors like how long you have worked for the company and how much is your salary. This offers certainty and you know what you will get each month in retirement, providing peace of mind.
2. Defined contribution plans
In contrast to defined benefit plans, defined contribution plans have a fixed contribution amount, but the final payout at retirement is not guaranteed. Your benefit depends on how much you and your employer contribute, and how those investments perform as they are market linked. This type of plan can be easier for employers to manage, but it places more risk on the employee, as the final retirement income is uncertain.
Additional read: SSY Scheme
Income tax benefits of superannuation
Superannuation funds offer tax benefits for both employers and employees, provided the fund is officially approved. This approval must be obtained from the Commissioner of Income Tax, and the fund needs to adhere to the rules set out in Part B of the Fourth Schedule of the IT Act.
A. For the employer
Employers can deduct contributions to approved superannuation funds as a business expense. Additionally, employee contributions up to Rs. 1 lakh are tax-exempt. Any amount exceeding Rs. 1 lakh will be subject to taxation.
B. For the employee
- The employee's contribution to an approved superannuation fund qualifies for a deduction of up to Rs. 1.5 lakh under Section 80C.
- If an employee withdraws any amount during a job change, it is considered taxable under the category "Income from other sources."
- Benefits received from a superannuation fund due to death or injury are tax-free, including the interest earned.
- Upon retirement, 25% of the commuted fund is fully exempt from tax. If the remaining amount is transferred to an annuity, it remains tax-free. However, if withdrawn, it becomes taxable for the employee.
After retirement, if this 25% amount is lying, and you don't know what to do, then you can consider investing this amount in a fixed deposit (FD). It provides a secure option with guaranteed returns. Bajaj Finance FD are AAA rated and for senior citizen they offer one of the highest interest rates of up to 8.85% p.a.
Conclusion
Superannuation is a useful retirement savings option provided by employers. Understanding its workings, plan types, and potential tax benefits is crucial for effective financial planning. If you are uncertain about your company's superannuation plans or how they operate, gathering more information is vital for making informed decisions about your retirement.
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