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.
Types of superannuation plans
Superannuation plans vary based on factors like contribution structure, investment options, and payout options. Common types include:
1. Defined benefit plans
Defined benefit plans promise a fixed retirement payout, calculated using factors such as your last drawn salary and years of service. The employer bears the investment risk, ensuring you receive a predetermined amount after retirement, offering stability and predictable income. For example, if your employer assures you a pension of Rs. 30,000 per month after retirement, you will continue to receive that fixed amount regardless of market fluctuations or investment performance.
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.
Types of annuities under the superannuation scheme
Under the superannuation scheme, employees have the option to choose from different types of annuities based on their financial needs and retirement plans. Each type of annuity determines how the pension amount will be paid after retirement. Below are the eight commonly available annuity types:
1. Annuity for life
This option provides a fixed pension amount to the retiree for their entire lifetime. Payments stop upon the annuitant’s death and no further benefits are payable to nominees.
2. Annuity for life with return of purchase price
In this plan, the retiree receives a pension for life. After their death, the original investment amount (purchase price) is returned to the nominee or legal heir.
3. Annuity guaranteed for 5, 10, 15, or 20 years
The pension is paid for a guaranteed period—5, 10, 15, or 20 years—regardless of whether the annuitant survives the full term. After the term ends, payments stop unless it is a life option.
4. Joint life annuity
This type ensures the annuity is paid as long as either the annuitant or their spouse is alive, making it ideal for couples seeking financial security.
5. Joint life annuity with return of purchase price
Here, the pension is paid to the primary annuitant and then continues to the spouse after their death. After both pass away, the purchase price is returned to the nominee.
6. Increasing annuity
This plan provides a pension that increases annually at a pre-defined rate (such as 3% or 5%), helping retirees manage inflation during retirement.
7. Deferred annuity
In a deferred annuity, the pension begins after a pre-decided deferment period, allowing the invested amount more time to grow before payouts begin.
8. Immediate annuity
Payments under this plan start immediately after the lump sum is deposited. It is suitable for individuals seeking instant post-retirement income through superannuation.
Income tax benefits of superannuation
Superannuation funds provide meaningful tax advantages to employers when contributions are made to an income tax–approved fund, making it a smart and compliant long-term benefit strategy.
A. For the employer
Employers contributing to an approved superannuation fund can enjoy tax efficiency while strengthening their employee benefits structure. Here’s how it works:
- Tax-deductible contributions: Employer contributions to an approved superannuation fund are allowed as a deductible business expense. This helps reduce the company’s taxable income while systematically supporting employees’ long-term retirement savings.
- Strategic employee benefit: Offering superannuation enhances the overall compensation package, improves employee retention, and reflects long-term financial commitment—without immediate cash outflow or added payroll tax burden.
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.
Difference between superannuation and retirement
While superannuation and retirement are often used interchangeably, they refer to different aspects of an individual's professional life and financial planning. Superannuation is a structured retirement benefit scheme offered by employers to help employees accumulate savings during their working years. Retirement, on the other hand, is the actual point at which an individual exits the workforce, either due to age or choice. Understanding the difference between the two helps in better financial preparedness.
Aspect
|
Superannuation
|
Retirement
|
Meaning
|
Superannuation is a fund created by the employer to support the employee post-retirement.
|
Retirement is the event when an employee stops working permanently.
|
Focus
|
Long-term savings and pension planning.
|
Life stage marking the end of active employment.
|
Nature
|
Financial tool or benefit scheme.
|
Personal or professional milestone.
|
Initiation
|
Begins during the employee’s working years.
|
Occurs typically at the age of 58–65, depending on policies.
|
Source of Funds
|
Contributions from employer (and sometimes employee).
|
May include superannuation, provident fund, pension, or other savings.
|
Payout
|
Provides annuity or lump sum at the time of retirement.
|
Marks the point when superannuation benefits may start.
|
Tax Benefits
|
Eligible for certain tax exemptions under Income Tax Act.
|
Not directly associated with tax exemptions.
|
