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Superannuation meaning

There are plenty of perks provided by an employer to its employees; out of those include retirement benefits. Be it an employee retention strategy or mandated by law, retirement plans such as NPS, provident fund, gratuity etc., are held in high regard as they form the backbone of an employee’s life. Superannuation is one such retirement benefit provided by employers to their employees.

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Superannuation meaning

Superannuation: A Comprehensive Guide to Retirement Planning

Supperannuation Retirement Planning
July 12, 2024

Table of Content

 

Introduction 

Employees often ignore this superannuation benefit due to a lack of knowledge about the scheme or some are not even aware of the fact that they are getting such type of benefits. Let's deep dive into the superannuation benefit, its types, tax benefits and much more.

Superannuation Meaning

Superannuation, also known as a company pension plan, is one of the types of pension plans offered by employers to their employees. In this, an employer makes a regular contribution towards the fund which is invested in various asset classes to generate stable recurring income for the employee upon retirement. At the same time, the employee can also make a voluntary contribution to the scheme.

How Does Superannuation Work?

Superannuation is a special type of retirement benefit plan offered by employers in which they make a regular contribution. The investment grows at an exponential rate over time due to the power of compounding. To estimate the potential retirement corpus from these contributions, you can use a retirement calculator. Some organisations (employers) manage their superannuation funds through their own trust, while others invest in superannuation benefit funds with asset management companies or insurance companies.

Employers can also purchase Group Superannuation Cash Accumulation Plans or Endowment superannuation plans from insurance providers. . Employee Provident Funds (EPS) and National Pension System (NPS) are other examples of government-supported superannuation schemes.

Usually, employers contribute (up to 15%) of the employee's basic pay and DA (dearness allowance) to an employee’s retirement fund. As the employer contributes to the employee's retirement benefit scheme, it forms a part of the employee's total CTC (Cost To Company).

Superannuation Types

Superannuation plans are of mainly two types, which are as follows:

1. Defined Benefits Plans

A defined benefit is a type of superannuation plan which offers a fixed benefit irrespective of the individual’s contributions. These predetermined benefits are determined based on several factors such as salary, employee vintage and the age at which the employee begins to receive the benefits.

This type of superannuation benefit can be a bit complex to calculate because the employer is responsible for ensuring such benefits.

2. Defined Contribution Plans

A defined contribution involves fixed contributions, and its benefits are directly dependent on these contributions and market conditions. Such a superannuation plan is manageable but shifts the risk to the employee, as he/she cannot be sure of the exact amount they will receive on retirement.

Types of Annuities Offered Within the Superannuation Program

Here are the different types of annuities available under a superannuation program:

  • Payable for Life:

This type of annuity plan ensures a steady pension income from the date of retirement until the end of your life, providing financial security without the fear of outliving your pension.

  • Payable for Life Guaranteed for 5 Years/10 Years/15 Years:

This annuity option offers a guaranteed pension for a specified period, providing financial stability during that time.

  • Payable for Life with a Return of Capital:

This type of annuity provides a pension for the rest of your life. Upon the demise of the individual, the remaining corpus is transferred to the nominee, ensuring financial support for your loved ones. Using a pension calculator, you can better estimate how much pension you may receive and plan accordingly.

  • Payable Jointly on the Life of Husband and Wife:

This type of annuity extends the pension to your spouse after your death. It provides you with an option to transfer the remaining amount to a selected nominee.

  • Increasing Pension: 

This type of annuity gradually increases the pension amount over time, addressing potential rising expenses after retirement.

  • Commutation:

This plan allows you to receive part of the fund as a lump sum while the rest is paid as a regular pension, providing a balanced approach to fund management and utilisation.

  • Return of Corpus:

Tax Benefits on Superannuation

Let's discuss the taxability of a superannuation scheme both from employer and employee viewpoints:

For Employer:

  • Employers are eligible to claim deductions for contributions made towards an approved superannuation fund, these are treated as deductible business expenses and claim tax deductions under Section 36(1)(iv)#, subject to the prescribed limits.

  • Moreover, any contribution made in excess of Rs. 7.5 lakh in a previous year made by an employer shall be liable to be taxed in the hands of the employee as perquisites under the head salary.  For Employee

  • For employees aiming for financial independence retire early (FIRE), voluntary contributions to an approved superannuation plan can be an effective strategy. As an employee, you can claim deductions under Section 80C# for these voluntary contributions, up to a limit of Rs. 1,50,000.

  • Lump sum amounts received by an employee from the superannuation fund at the time of retirement or termination of service or in case of death are exempt from tax under Section 10(13)#, subject to certain conditions and limits.

  • If the employee opts to receive the accumulated amount in the form of a pension or annuity, the regular pension payments received will be taxable as salary in the hands of the employee in the year of receipt.

What Is the Difference between Superannuation and Retirement?

Here are some of the key differences between superannuation and retirement, shown in a tabular format:

 

Point of Difference

Superannuation

Retirement

Meaning

A superannuation plan is a type of retirement benefit scheme provided by employers to their employees. In this, the employers make contributions which grow into a substantial corpus at the time of retirement.

It is the phase of life where one stops generating active income or reduces working hours significantly due to old age or age-related disabilities. It can also be because of sufficient wealth accumulation to fund the rest of the life.

Type of Account

Specially designed retirement benefit scheme with structured rules around investments, withdrawals and contributions.

It typically refers to savings in any form such as a retirement savings account with no defined rules.

Flexibility

Not flexible, as withdrawals are allowed only in certain scenarios like death, disability, etc.

These are usually flexible in nature.

Primary Objectives

It is designed with the primary aim of funding living costs during the retirement years.

The prime objective is to stop or reduce working due to enough wealth accumulation. 

Retirement Planning and Life Insurance

Some retirement plans incorporates life insurance coverage, offering both financial securities for retirement and protection for family members. This dual benefit includes accumulating a retirement fund while also serving as a safety net with a lump-sum payout in the event of the policyholder's death.  It's important to note that life cover is typically not included in annuity plans individuals must opt for pension plans that specifically include life cover to benefit from this protection. This strategic approach ensures peace of mind by guaranteeing financial stability not just in retirement but also for the future.

FAQs on Superannuation

1. What is superannuation in salary?

Superannuation is included in the total CTC of an employee as the employer contributes a certain percentage of his/her basic salary and dearness allowance on a regular basis. It is a part of the variable component of the CTC.

2. What is superannuation and gratuity?

Superannuation is a special type of pension plan which involves regular contributions towards a fund, which are then invested in various asset classes generating stable income post-retirement. On the other hand, gratuity is a lump sum payment made at the time of retirement by the employer, acknowledging the employee's years of service and contributions.

3. Is superannuation compulsory in India?

No, it depends on the employee’s choice of investment needs.

4. Are superannuation and PF the same?

No, superannuation and provident fund are not the same, though they are similar kinds of retirement benefit plans. A superannuation plan is a voluntary pension plan whereas provident funds are compulsory pension plans in India.

5. Will I get superannuation if I resign?

Yes, if an employee resigns, he is eligible to receive superannuation fund and the entire fund would thus be taxable. 

6. Is superannuation part of the CTC?

Yes, superannuation benefit is included in the total CTC (Cost-To-Company) of an employee.

7. Can I withdraw my superannuation in India?

You can withdraw your superannuation at the time of retirement and under certain specific circumstances like financial crisis, death and disability.

Conclusion

To sum up, superannuation is a special type of pension plan offered by employers. It involves regular contributions towards a fund which are then invested in various asset classes generating stable income post-retirement. It forms a vital part of retirement planning, offering financial security and peace of mind for your golden years.

Start planning today to secure a brighter and more stable future for yourself and your loved ones

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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2. Tax Laws are subject to change from time to time. Tax benefits are subject to conditions under Sections 80C, 80D, Section 10(10D) and other provisions of the Income Tax Act, 1961.

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