Superannuation

Superannuation meaning refers to a retirement fund where employers and employees contribute, providing financial support after retirement through accumulated savings.
Superannuation
3 min
16-May-2025 

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.

What is superannuation?

Superannuation, often referred to as a company pension plan, is a retirement benefit scheme provided by employers in India. It involves building a fund in each employee’s account over time, with contributions enjoying tax benefits until retirement. At the time of retirement, employees can access these accumulated funds to support their post-retirement financial needs.

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

Pro tip

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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

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.

 

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.

What is the meaning of superannuation fund?

A superannuation fund is a pension program created by an organization for the benefit of its employees. It involves regular contributions by the employer, and sometimes the employee, to provide financial security during retirement.

What is the simple definition of superannuation?

Superannuation refers to an organized retirement savings system where regular contributions are made into a fund during an individual's working life. The accumulated funds provide income during retirement, ensuring financial stability.

What is the meaning of retiring on superannuation?

Retiring on superannuation means leaving the workforce and beginning to receive benefits from one's accumulated superannuation fund. This marks the transition from employment to retirement, supported by the savings and contributions made over the years.

What is the difference between retirement and superannuation?

Retirement refers to the stage when an individual stops working permanently, while superannuation is a retirement benefit scheme where the employer contributes regularly to build a fund that supports the employee financially after retirement.     

Can I withdraw superannuation in India?

Yes, superannuation can be withdrawn in India upon retirement, resignation, or under certain conditions like disability. Withdrawals may be partly tax-free, while the remaining amount could be used to purchase an annuity plan.

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Disclaimer

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