SUPERANNUATION FUND

A superannuation fund, often known as a company pension plan, is a type of pension plan that businesses put up for their personnel. An employer frequently purchases a superannuation policy from an insurance provider on behalf of its employees. After that, they set aside a specific portion of an employee's pay for this policy, which is typically represented in the worker's Cost to Company (CTC).

One can access up to one-third of the whole benefit from the superannuation fund once they reach bank retirement age. The remaining funds are subsequently transferred to an annuity plan, guaranteeing a consistent pension source after retirement. When changing jobs, there are a few options to think about.

EMPLOYER CONTRIBUTION

A maximum of 15% of an employee's basic salary and dearness allowance may be contributed by the employer to a superannuation fund. The type of superannuation fund determines the amount of superannuation. There are typically two main categories of superannuation funds.

These two types of plans are:-

1. Defined contribution Plan
2. Defined benefit Plan

DEDUCTION

Employer contributions to approved superannuation funds (as determined by the income tax department) are deductible business expenses.

Employer’s contribution of up to Rs 1.5 lakh in respect of an employee is exempt. However, if the contribution exceeds Rs 1.5 lakh, the amount in excess will be taxable in the hands of the employee as a perquisite.

FOR EMPLOYEES

1. Employer’s contribution of up to Rs 1.5 lakh in respect of an employee is exempt. However, if the contribution exceeds Rs 1.5 lakh, the amount in excess will be taxable in the hands of the employee as a perquisite.
2. Interest from a superannuation fund is tax free.
3. Employees contribution to the approved superannuation fund is deductible under section 80C subject to overall limit of Rs.1,50,000.00

WITHDRAWAL FROM THE FUND BY EMPLOYEES

1. Any amount withdrawal by the employees at the time of job change is taxable under the head “Income from Other Sources”
2. Any benefit received from superannuation fund on death or injury are tax Free.
3. On retirement, 1/3^rd of the commuted fund is fully exempt from tax and remaining amount if transferred to annuity is Tax Free and if amount is withdrawn is taxable in the hand of employee.

COMBINED UPPER LIMIT

The annual budget for the year 2020, provisioned a new combined upper limit of ?7,50,000 for the employer’s contribution to retirement funds like NPS, EPF, and funds. Further, under the new regime, any contribution made by the employer over ?7,50,000 is taxable. Therefore, the interest, dividend, or other benefits accumulated on retirement funds are added to the employer’s income and are taxable.

WORKING OF SUPERANNUATION

The superannuation fund of the employees receives a guaranteed contribution from the employer. On behalf of the employer, this fund is managed by the company trust or by any authorized insurance provider. The employer contributes a set percentage of the employee’s basic salary and dearness allowance to the superannuation fund for a specific group of employees.

In actuality, the employer makes this contribution, making it a part of the company’s costs (CTC). However, in the case of defined contribution plans, an employee may also make a voluntary additional contribution to the fund.

SCHEMES OF SUPERANNUATION

1. Defined Benefit Plans

The benefits one receives upon retirement under this kind of superannuation plan are solely based on their rank, age at retirement, length of service, and final income. The employee receives a pension at predetermined intervals after retiring, which is paid in advance. The defined contribution plan is also more complicated, and the employer bears all of the risk associated with it.

2. Defined Contribution Plans

Most companies prefer this plan over the defined benefit plan because of the ease of management. Further, the risks involved in this plan lie entirely on the employee as they wouldn’t know the exact amount they would receive after retirement. Additionally, the benefits the employee would receive depend on his contribution to the superannuation plan and the market forces at the time of his retirement.

CALCULATION OF BENEFIT UNDER SUPERANNUATION

Superannuation calculations can be complicated. An employee must be associated with the company for a minimum of three years to avail of maximum benefits.

Types of Annuity Options

There are four common types of annuity options available in India

1. Payable for life
2. Further, payable for life guaranteed for a period of 5, 10, or 15 years
3. Payable for a lifetime  with capital return
4. Payable for the joint lifetime of husband and wife