Everything You Need to Know About Superannuation

Superannuation is a retirement benefit that can help employees plan for their future financial security. Other retirement savings plans offered by employers include provident funds, gratuities, and the National Pension System (NPS). We’ll explain the superannuation system in full so you can take advantage of its benefits.

What is Superannuation?

The term ‘superannuation’ refers to the process of retiring. Retirement could be due to old age or a physical handicap. As a retirement plan, employers provide superannuation benefits to their employees.

How Does Superannuation Work?

Superannuation is offered as a retention incentive by the employer, who contributes a set proportion to it.

The amount of contribution is calculated using the total of an employee’s base pay and dearness allowance. The employer’s contribution to the programme is a percentage of the total up to a maximum of 15%.

Employees also contribute the same percentage to the plan as a long-term investment. The benefits and contributions paid by the employer under superannuation are included in your Cost To Company (CTC).

Employers make contributions on behalf of their employees to the group retirement fund, which he manages. There are several choices for handling this, including creating their own trust or investing in one that has been approved. Superannuation plans are also offered by insurance firms, such as the LIC’s New Group Superannuation Cash Accumulation Plan and ICICI’s Endowment Plans.

If the scheme allows it, you can additionally donate an additional sum to the same fund. You can withdraw up to 1/3 of your cumulative benefit when you retire. The remaining funds are converted into an annuity fund. You have the option of receiving the funds as a regular pension or annuity return at certain periods.

Even if you move jobs, your superannuation money is safe. You can either transfer the funds to your new employment or keep them till you retire. If your new company does not provide superannuation benefits, you can withdraw the funds entirely.

Types of Superannuation Benefits

The sorts of superannuation advantages available to you are listed below:

Defined Benefits Plan

You get fixed rewards regardless of how much you put into this sort of superannuation plan. A pre-existing formula is used to calculate the benefit amount. The calculation is based on several parameters, including the number of years of service and the remuneration. The age at which you will begin to reap the benefits of the scheme is also defined at the time of its inception. It has a higher level of complexity, and the employer bears the risk of delivering scheme benefits. You will receive the pre-determined amount at regular periods once you retire.

Defined Contribution Plans

The defined contribution plan, unlike the defined benefit plan, has a pre-determined contribution amount. Market forces drive the rewards you receive, which are directly proportional to your input. Although more controllable, the employee bears the risk of this form of benefit. You can’t know exactly how much money you’ll get when you retire.

Income Tax on Superannuation

The superannuation system offers tax advantages to both businesses and employees. To implement the programme, a qualifying organisation must first acquire clearance from the Commissioner of Income Tax.

Employer

Employers can take advantage of tax incentives under Section 36 of the Internal Revenue Code. They can claim a tax deduction for their payment to the superannuation fund.

Trustees can claim a tax exemption on income from an authorised superannuation fund under Section 10 of the Income Tax Act.

For the employer’s contribution to retirement plans, a combined maximum limit of Rs. 7,50,000 has been imposed. It covers NPS, EPF, superannuation, and other funds, among others.

The tax system for employers has been altered by the government. Any contribution made by an employer over Rs. 7,50,000 is taxed under the new system. As a result, interest, dividends, and other benefits collected on retirement accounts are now included in the employer’s income and are taxable.

Employee

Employees can deduct their contributions to an approved superannuation fund from their taxable income. The deduction is allowed under Section 80C of the Internal Revenue Code.

Employees are responsible for paying taxes on the portion of the employer’s contribution that exceeds Rs. 1,50,000. Section 17(2)(vii) of the Income Tax Act makes it applicable.

Furthermore, you are tax-free if you remove up to a third of your annuity amount after retirement.

Funds released in the event of an employee’s death are tax-free. Any payment made due to incapacity that results in the loss of a job before the age of retirement is also tax-exempt. It is governed by the Income Tax Act’s Section 10(13).

The interest you earn in your superannuation account is not subject to income tax.