Superannuation is a retirement plan offered by employers to their employees, where an employer contributes to the retirement fund of an employee.
In India, superannuation usually refers to pension and endowment plans, gratuity, and provident fund.
How does it work?
An employee receives the accumulated amount at the time of retirement. The employee is eligible to withdraw up to one-third of the accumulated benefit, and the balance is converted to a regular pension in the form of annuity.
In India, the employer contributes a fixed percentage (which is not more than 15%) of the basic pay and dearness allowances.
This contribution by the employer towards the superannuation fund is computed and added to the Cost to Company figure. Under a contribution scheme, an employee may choose to contribute more than 15% from his/her side. .
Four types of annuity plans are commonly available to the employees. These are:
Annuity for Life
Annuity for Life - Guaranteed for limited years
Annuity for Life - Return of Capital option
Annuity for the individual and spouse.
There are various income tax benefits and exemptions that can be availed by both the employee and the employer.
The employer can show these contributions as business expenses and claim tax deductions. The employee can avail himself/herself of the following relaxations:
Contribution up to Rs. 1.5 lakhs are exempt from any income tax.
At the time of retirement, two-thirds of the fund will not attract income tax, and the rest of the amount would also be tax-free if converted to an annuity plan. However, if the rest of the amount is redeemed, taxes need to be paid.
Any interest earned on superannuation is tax-free.
Superannuation allows an employee effective tax planning options while ensuring proper financial support on retirement.
The superannuation plans are classified into two types:
Defined Benefit Plan - The employer defines the monetary benefits that an employee will be eligible to receive on retirement. These benefits generally depend on years of service in the organization, rank, age of retirement, salary, etc.
Defined Contribution Plan - The benefits of the plan depend upon the market forces and the contribution by the employee. Here, the amount received by the employee at the end of his career is not predetermined .
With several financial benefits, a superannuation plan provides an employee with the opportunity to secure his/her future.
Furthermore, careful financial planning can ensure a life of abundance after retirement for an employee.