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
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 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 7.30% p.a.
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
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Superannuation
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Retirement
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Meaning
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Superannuation is a fund created by the employer to support the employee post-retirement.
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Retirement is the event when an employee stops working permanently.
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Focus
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Long-term savings and pension planning.
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Life stage marking the end of active employment.
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Nature
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Financial tool or benefit scheme.
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Personal or professional milestone.
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Initiation
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Begins during the employee’s working years.
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Occurs typically at the age of 58–65, depending on policies.
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Source of Funds
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Contributions from employer (and sometimes employee).
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May include superannuation, provident fund, pension, or other savings.
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Payout
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Provides annuity or lump sum at the time of retirement.
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Marks the point when superannuation benefits may start.
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Tax Benefits
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Eligible for certain tax exemptions under Income Tax Act.
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Not directly associated with tax exemptions.
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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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