Superannuation Pension Benefits, withdrawal & Taxation in India

Superannuation is probably a less touched topic by Indians. Most people do not know what it means, what are the benefits and how it can it help you on a bigger picture. Superannuation is basically a part of your salary that is put aside for your retirement. This amount goes towards your pensions post-retirement such that you do not crumble financially. This amount can be taken out and utilized by you post your retirement. Superannuation is basically a long term saving plan. The amount contributed by you will earn value over time and you can enjoy the benefits tax-free.

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Superannuation is an additional support towards your pension apart from EPF.

Superannuation benefit plans

There are two types of superannuation benefits plan.

• Defined benefit

  In this, the amount received on retirement is fixed. The employer is aware of the amount he will receive at the end of their service. The amount depends on the designation and their salary. Usually, employees prefer defined benefit plan as the risk involved is minimal.

• Defined contribution
  

  In this plan, the contributions made towards the savings scheme by employees and employers is known and fixed. You will not receive a fixed amount post your retirement. Thus it is the risky plan as the member does not know how much amount he shall receive after his completion of service.

Superannuation with LIC & Other Banks like ICICI, HDFC, SBI, Axis.

Your employer makes a yearly contribution towards your superannuation account. It is advisable to know your savings balance such that you can plan your investments better. LIC superannuation fund is one such agency where your employers can contribute on your behalf.

• The Company pays 15% of basic wages as superannuation contribution. There is no contribution from the employee.
• Also, the rate of interest gained on this amount is usually equivalent to the PF interest rate.
  On reaching the retirement age, the employee is eligible to take 25% of the balance available in his/her account as a tax-free.
• The employee can receive the remaining 75% on a monthly/quarterly/periodic annuity returns depending on the option opted by him/her. This is subjected to tax deductions.
• In case any employee resigns, he/she can transfer the superannuation amount to the new employer. In case the new employer does not have a superannuation scheme, then the employee can withdraw the amount in the account but it will subject to deduction of taxes.
• On completion of three years, the employee can withdraw 1/3rd of the accumulated balance after retirement and can avail the rest as monthly pension till end of life. For example, if an employee retired with SAF corpus of INR 15 lakh, hence he can withdraw INR 5 lakh (= 1/3 of 15 lakh) which will be fully tax-free and buy an annuity from an insurer with the rest of the amount of INR 10 lakh.

ICICI bank also provides superannuation accounts. The rules remain the same in both the accounts. The rate of interest might vary in both insurance companies.

Taxation on superannuation fund

So basically your employer will make from 0% – 15% contribution of your basic salary towards the fund. The Commissioner of Income Tax approves all superannuation fund. The rules pertaining to this is in Part B of the Fourth Schedule of the Income Tax Act. You must check with your employer for the status of your superannuation.

The taxation on superannuation fund are as follows:

• Employee’s maximum contribution can be 1.5 Lakhs.
• No taxes levied on interest received on the superannuation funds.
• Employers’ contribution is of the maximum of 1 Lakh towards superannuation fund. Thus there is exemption from taxes till the maximum cap. Above 1 Lakh, taxes will be levied.
• If the employee wishes to withdraw before retirement and at the time of resignation, the entire amount will subject to tax deductions. There are exceptions to this rule where there are no tax deductions such as
  • On the death of an employee, the amount will pass on to their legal heir.
  • If the payment is made to an employee as an annuity plan after their retirement (voluntarily or due to age limit)
  • Then, any commutation of the annuity is exempt from tax.
  • If the employee has some disability.
  • Contributions made before April 1, 1962, are exempt from taxation.

Another important point to note is that once the employer creates a superannuation trust, then employer can’t stop contributing in between.