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What is Superannuation?

Building a sizable corpus for your post-retirement life has become essential, especially in this economy. While you can invest in different types of schemes and plans, certain retirement plans, as an employee, make you entitled to receive benefits at the time of your retirement. One such plan is superannuation.

If you are a salaried employee, you must have come across the term superannuation. This basically means retirement however, it is important for you to understand the details of such plans as an employee. Keep reading as we walk through superannuation in detail.

How Does Superannuation Work?

To begin with, you must know that superannuation fundamentally means retirement and a superannuation plan is designed to offer benefits at the time of your retirement. In India, most employers offer some form of superannuation plan that not all employees are aware of.

The working of superannuation in India differs from one employer to another but in most cases, employers have created a superannuation fund as per the schemes notified by the pension fund regulatory regulatory and development authority. At the time of retirement, the employer is liable to provide benefits from these funds.

Types of Superannuation

Employers offer different types of superannuation plans that employees can voluntarily adopt. Now, while there are different terms and conditions on which each employer offers such plans, here’s a list of different types of superannuation plans to give you an overview:

  • Plan with Defined Benefits

    Under this type of superannuation plan, you get benefits based on predetermined factors like your salary and employment duration etc. The contributions you make throughout your employment towards the fund do not impact the benefits you would be entitled to at the time of retirement.

  • Plans with Defined Contributions

    As the name suggests, plans with defined contributions do not come with predetermined benefits; rather, they are based on the predefined contributions you make during the course of your employment. The contribution is usually a fixed sum of money from your monthly salary and the benefits you get at the time of retirement depend on the contributions and the performance of the funds in which they are invested.

Benefits of Superannuation

A superannuation plan is beneficial for employees as it promises to build a sizeable corpus that will help them live a peaceful life even when their regular source of income stops. Let’s take a look at some of the benefits of superannuation that you must be aware of before investing in a plan:

  • Affordable Retirement Benefits

    A Superannuation plan is designed to ensure an affordable investment option. In most cases, only a small percentage of the employee's salary is contributed towards the superannuation fund.

  • Simplified Schemes

    One of the biggest advantages of superannuation plans is that these plans do not require employees to understand or have an extensive analytical approach towards market trends. These plans are straightforward and simple to understand making it easy for employees to pick a plan that suits their post-retirement life.

  • Option to Diversify Investment

    Superannuation plans also come with an option to diversify the investment portfolio by investing in different types of assets like debt, hybrid funds, equity etc. In addition to building a sizable corpus, through these types of investments, employees can benefit from decent returns.

  • Easily Transferred

    Another benefit of a statutory superannuation plan is that it can be transferred from one employer to another every time you switch jobs. This ensures that you get to reap the benefits of the plan till the time you retire irrespective of how many times you switch your job. However, remember that these types of benefits are usually not available in voluntary plans and are only available for statutory superannuation plans.

  • Promised Benefits

    Regardless of the type of plan you choose, a superannuation plan promises benefits. If it is a plan with defined benefits you get to receive a predetermined sum of money at the time of retirement and if it is a plan with defined contributions you get to enjoy benefits for the contributions you make during your employment.

Superannuation Vs Other Retirement Schemes

Superannuation is a type of retirement plan but it differs from other retirement schemes in ways of offering benefits, contributions, tax liabilities etc. Let’s take a look at some of the factors that differentiates superannuation from other retirement schemes:

  • Nature of Enrolment

    Superannuation plan is a voluntary retirement plan offered by the employer unlike other retirement schemes that are compulsory.

  • Affordable and Simple

    Superannuation plans are affordable as they charge low fees compared to other retirement plans. Additionally, superannuation plans are easy to understand and do not require deep market research.

  • Tax Liabilities

    Only 25% of the benefits offered at the time of retirement are exempted from tax liabilities under superannuation plan. Plans like Public Provident Funds offer tax free investment options.

Tax Implications of Superannuation in India

Remember that if the superannuation plan is officially approved and registered it office tax benefits and imposes some liabilities on both the employer and employee. The approval must be obtained from the Commissioner of Income Tax and the employer has to ensure that the superannuation fund is being managed by the provisions given under part B of the fourth schedule of the Income Tax Act.

Let’s take a quick look at the tax implications on the employer and the employee:

  • For the Employer

    Employers can enjoy tax deductions for contributions made towards superannuation funds claiming these contributions under business expense.

  • For the Employee
    • Contributions made towards the fund are exempted from tax liabilities up to ₹1.5 lakh under section 80C of the Income Tax Act, 1961.
    • If a withdrawal is made during the employment, the amount withdrawn is taxable.
    • If the employee gets a withdrawal due to death or injury then the benefits are exempted from tax liabilities.
    • 25% of benefits received upon retirement are exempted from tax liabilities. In case, the remaining fund is transferred to another annuity it becomes tax-free. Any additional withdrawal is liable for tax implications.

How to Enroll in a Superannuation Plan?

The enrolment process for a superannuation plan varies from one employer to another. Once an individual has been appointed as an employee, they become eligible to enrol for a superannuation plan.  The entire process is explained to the employee in detail by the employer.

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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.  

For All Disclaimers Click Here: https://www.bajajbroking.in/disclaimer

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The information provided on this website is for general informational purposes only and is subject to change without prior notice. BFSL shall not be responsible for any consequences arising from reliance on the information provided herein and shall not be held responsible for all or any actions that may subsequently result in any loss, damage and or liability. Interest rates, fees, and charges etc., are revised from time to time, for the latest details please refer to our Pricing page.

Neither the information, nor any opinion contained in this website constitutes a solicitation or offer by BFSL or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.

BFSL is acting as distributor for non-broking products/ services such as IPO, Mutual Fund, Insurance, PMS, and NPS. These are not Exchange Traded Products. For more details on risk factors, terms and conditions please read the sales brochure carefully before investing.

Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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