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RETIREMENT PLANS BUYING GUIDE
:1800-266-9777
Superannuation: A Comprehensive Guide to Retirement Planning
Table of Content
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, 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.
Benefits of Superannuation
Offering numerous benefits to employees, superannuation schemes have turned out to be a popular savings option upon retirement. Here are some notable benefits of the superannuation scheme:
Reduced Fee Structures
Simple Features
Options for Investment
They Can Stay With You Throughout Your Career
You Can Access Them Before Retirement
Steady Income During Retirement
Superannuation plans usually charge lower fees in comparison with other options for retirement, thereby making it a cost-effective option for saving for retirement.
Superannuation plans offer easy, simple, and straightforward features considering your needs and additional services that can be chosen as per your preferences, thereby making it easy to handle and comprehend.
With a superannuation plan, you can avail different options for investment that include public, industry, retail, corporate, or self-managed super funds. With this kind of flexibility, investment strategies can be further customized as per your risk appetite and personal preferences.
A superannuation scheme can stay with you throughout your career instead of any of your employers. This thereby follows your entire career. These kinds of funds are termed stapled super funds.
During temporary periods of not being able to work or medical emergencies, you can gain access to an approved superannuation scheme. It charges no penalty and also acts as a financial safeguard to assist you during difficult times.
A superannuation plan ensures to provide a steady income throughout retirement. Thus, there lies no scope of running out of retirement funds before death. This way, you can attain a separate peace of mind with a stable financial future.
Types of Annuities Offered Within the Superannuation Program
The superannuation program annuities are designed specifically to provide financial security during years of retirement. 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.
Guaranteed Payments for 5, 10, or 15 Years
This type of annuity guarantees you a steady income for a period of 5, 10, or 15 years, considering your choice. It thereby provides certainty as there is commitment of guaranteed payments for the selected period, irrespective of the market condition. This will be an ideal choice if you prefer earning a fixed income for a specified time duration.
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.
Paid Together for Both Husband and Wife
With this annuity plan, both husband and wife guarantee to receive payments on a fixed time. This allotted income continues for a lifetime and is applicable for both individuals, ensuring financial security. Moreover, it helps to ensure that a spouse does not need to face any difficulty with the sudden demise of the other person.
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
Similar to other benefits of retirement plan, superannuation plans also offer benefits of taxation to both the employer and employee. These benefits are however restricted to an approved superannuation fund. The Commissioner of Income Tax must provide this approval according to the rules set in Part B of the Fourth Schedule of the IT Act2.
Benefits for an Employer
Benefits for an Employee
Superannuation offers several tax benefits for employers. Contributions made to employee superannuation fund are tax-deductible, reducing the employer’s taxable income.
By making contributions to a superannuation fund, employers can help employees save for retirement, while also taking advantage of these tax benefits to reduce overall business tax liabilities. These incentives encourage employers to offer superannuation as part of their employee benefits package.
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
Here are some key considerations for the employee:
a) The contribution of an employee towards the approved superannuation fund is subjected to deduction under Section 80C with an overall limit of Rs. 1,50,000
b) 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.
c) If an employee withdraws an amount during changing of jobs is subjected to taxation under the head "Income from other sources"
d) Interest accrued from an approved superannuation fund is tax-free
e) Upon retirement, one-third of the commuted fund is exempted from taxes and rest of the amount, if transferred to an annuity is also tax deductible.
f) Contribution of an employer of up to Rs. 1.5 Lakh is exempted from taxes. If this contribution exceeds Rs. 1.5 Lakhs, the excess amount is taxed in the hands of an employee
g) You can also avail tax exemption through transferring the employee’s account into a pension scheme applicable under Section 80CCD2 as notified by the Central Government
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.
Summary
To conclude, the superannuation concept has turned out to be an essential tool for employees to secure their life post-retirement. Opting for this kind of plan ensures a steady source of income after retirement. You are also eligible to withdraw a lump sum amount for managing large expenses.
Alongside providing financial security during your old age, superannuation also provides you with tax benefits. However, spreading awareness of this scheme is of utmost importance to let employees reach an informed decision making about their respective retirement planning, strategies.
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.
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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 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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1. Provided all due premiums have been paid and the policy is in force.
2. Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.
ARN - ED/01/25/20302
