What is superannuation?

Learn about superannuation and how it can help you in retirement.
Superannuation
3 min
23-April-2024

Many employers offer a range of retirement benefits to their employees, whether mandated by law or as a strategy to retain employee. These benefits might include provident funds, gratuity, NPS, etc. Superannuation is a valuable retirement benefit that many employers provide to their employees.

Unfortunately, superannuation benefits are often overlooked by employees. Many may be unaware of their availability since these contributions do not immediately impact their take-home pay. Grasping the mechanics of superannuation is vital for effective financial planning and securing a comfortable retirement.

Superannuation meaning

A superannuation scheme is a pension plan provided by a company or employer for its employees. Commonly known as a company pension plan, superannuation allows the accumulation of funds in employees' accounts until their retirement. Upon retirement, these funds can be withdrawn, ensuring a financially secure future. Superannuation funds can often be invested in a variety of options, including fixed deposits for guaranteed returns.

In simpler terms, superannuation is a retirement pension scheme that helps in future planning while offering tax exemptions for individuals.

Additional read: NPS (National Pension Scheme)

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

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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Frequently asked questions

Is superannuation taxable in India?

Under the old tax regime, your contributions to a superannuation fund qualify for a deduction under Section 80C. However, if you opt for the new tax regime, this deduction is no longer available. This means your superannuation fund contributions will not reduce your taxable income if you choose the new tax system.

Can I withdraw my superannuation after 60?

Yes, after reaching the superannuation age, you are usually eligible to withdraw your superannuation funds, with options for lump-sum or pension-based payouts.

What is the retirement age for superannuation?

The standard superannuation retirement age in India is usually 58 or 60, but it can vary based on your employer's policies.

Disclaimer

As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or refer https://www.bajajfinserv.in/fixed-deposit-archives
The company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

For the FD calculator the actual returns may vary slightly if the Fixed Deposit tenure includes a leap year.