What is Superannuation fund in India?- In Comparison to NPS

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Superannuation fund benefit is one of the benefits that employer provides to its employees. Since this does not require any contribution from the employee so generally this gets ignored by them. But it is important to understand its working and taxation to make the best use of it.

I was of the view that now days with so many different options available with the employer to give benefit to employees, this superannuation benefit may not be opted by them since unlike Employee provident fund and Gratuity, this benefit is not mandatory for them. But No I was wrong, as recently I have seen few salary slips of my new clients showing superannuation fund as part of their CTC. So this is still in existence.

Generally, Superannuation is a part of CTC (Cost to a company), and thus it reduces the take home salary of the employee. Though in some cases, the employer makes it optional for the employee and if the employee does not want this benefit, then s/he can ask for this amount in Monthly salary. But this option has to be exercised only at the start of the Job. This is what I was advised by my Branch manager when I joined ICICI Bank back in 2003.

Does that mean that you should also do the same? Well, there is no harm in that, but only after understanding the product features. Because my and your requirements, risk profile, Investment behavior are different and thus Superannuation fund may suit you. Moreover, it may also be possible that your employer may not give you the option to opt out of it, as was the case with one of my client.

Let’s first understand what a superannuation benefit is and how it works in Indian scenario

What is Superannuation fund benefit in India?

The word superannuation is normally used as a synonym to Retirement. Superannuation benefit is a Retirement benefit provided by the employer to their employees.

In simple terms Superannuation benefit is the pension plan bought by the employer for its employees. Employer contributes a certain amount to a Group Superannuation policy bought for this purpose and at the time of Retirement, the employee starts getting pension depending on the plan variant which employer has opted for at the time of contribution, and also the option that employee may have to exercise at the time of Retirement.

Superannuation benefit comes in 2 variants, where the employer decides as to what it wants employees to receive a pension as. It may be a defined benefit plan or a defined contribution plan.

In the case of defined benefit, a formula is worked out generally based on the last salary drawn by the employee, which results in a fixed amount which employee keeps on getting every month as pension/annuity, this amount may or may not keep increasing with Inflation. Thus in defined benefit plan, Insurance company and the employer have to work out how much return should be generated and how much contribution to be made to reach that defined level.

The second variant which most of the employers opt for is the defined contribution plan. In this case Maximum of 15% of basic salary is contributed by the employer into the superannuation fund. Employees also have the option to contribute voluntarily to this fund. At the time of retirement whatever the corpus of the fund, that can be used to start with the pension/annuity amount.

Superannuation fund benefit – Tax rules

First thing first, since the amount which Employer is contributing is something you are not receiving your monthly Salary, so it is not taxable in your hands. But there is one clause, where if the employer contribution exceeds Rs 1 lakh in a financial year, then the extra amount will be taxed as Perquisite in the employee’s salary.

Employee contribution will come under section 80C and will fall within the overall Limit of Rs 1.50 lakh.

At the time of Retirement, the employee may withdraw 1/3rd of the corpus as commuted tax-free money and for the rest 2/3rd s/he has to compulsorily buy an annuity from the Insurer.

If an employee leaves the organization before attaining superannuation/Retirement, then he may withdraw the complete money in the lump sum, which is completely taxable and will be added to his total Income in the year of superannuation withdrawal and to is taxed accordingly.

Superannuation fund or New pension Scheme (NPS) – which is better?

If you know how NPS works, then you will find much more similarity in Superannuation and NPS, at least from contribution and distribution perspective.   However, NPS comes under section 80CCD, where you can claim tax benefit of Rs 50000 more, which is over and above section 80C.

There are 2 main differences between superannuation benefit and new pension scheme. One is that unlike superannuation, in NPS you cannot withdraw the account balance completely when you leave your job. You can only make partial withdrawal as per the rules laid down on NPS withdrawal and have to buy pension compulsorily or continue the account until retirement.

The other main difference is which depends on the type of superannuation scheme your employer has opted for. If it is ULIP then the corpus will generate market linked investments and if it is endowment then it will generate the conservatively fixed return. Whereas NPs is a market linked product.

Recently Government has come up with a notification which has allowed individual employees to move their corpus from Superannuation to New pension scheme. This would be a one-time transfer and will not attract any tax liability on the transferor.

Conclusion:

As far as superannuation fund working is concerned, there is nothing to be commented on, as it has a set structure. However, when you compare it with other options available then definitely you look at the pros and cons of the product.

On the face of it to me, NPS looks like a more attractive product as compared to superannuation. As it has potential to generate much better returns with working more or less similar to a superannuation scheme, one would be better off in NPS. Had this been a comparison between EPF and NPS then I would have preferred EPF over NPS due to the taxable structure in NPS.

So one can look at shifting Superannuation fund to NPS but only after understanding its working and figuring out its suitability with one’s future requirements.

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He’s MBA ( Finance) gold medalist, a CERTIFIED FINANCIAL PLANNER and SEBI Registered Investment adviser. An ex banker , having a decade long experience in financial services industry he manages clients across the globe. He is a regular contributor to various leading Media and publication houses. He keeps on writing for Moneycontrol, Dainik bhaskar, Business standard etc. He also delivers training on Various personal finance topics to various corporate houses. You may get in touch with him at [email protected]

9 COMMENTS

  1. Nice article detailing superannuation plan and how it works. I have two queries :
    1. You said that if the employer contribution exceeds Rs. 1 lakh in a financial year, then the extra amount will be taxed as Perquisite in the hands of employee. I want to know under which section or clause of Income Tax Act this is applicable. To my knowledge, this is not so. Total expense/contribution allowed to an employer is 27% (12% toward PF/EPF and 15% towards superannuation) of the salary as business deductible expense. Nothing is mentioned on what you have stated.
    2. Under what section or clause of the IT Act, it is mentioned that if an employees wants to withdraw the complete money in the lump sum form, then the entire amount is taxable in the hands of the employees and whether employer has to deduct any TDS on this or not. Because I have tried to withdraw my superannuation accumulation from my employer before retirement, they have said no. In fact, I offered them to deduct full TDS at marginal tax rate and then make payment to me, still they have said no.
    You are requested to kindly put some clarification to these queries.
    regards

    • Thanks, Kamal Ji
      1. You may refer these Threshold limits and see point number 23. http://www.incometaxindia.gov.in/charts%20%20tables/threshold_limits.htm
      Also http://profit.ndtv.com/news/budget/article-tax-exemption-raised-to-rs-1-5-lakh-under-superannuation-fund-1282596 this would be of some help. I can see, I have goofed up a bit as it seems the limit of Rs 1 lakh has been increased to 1.5 lakh

      2. This was the result of my discussion with one of my friends who has just left his job. Since he has gone abroad and thus superannuation balance cannot be transferred to another employer, so he was allowed to withdraw the complete amount.

      • 1. Your referred point No. 3 from your file reads like this:
        “Tax on contribution to an approved superannuation fund by the employer in respect of the employee” – so it is tax on contribution not on withdrawal. What we are discussing is tax on withdrawal.
        2. I am still of the opinion that superannuation cannot be withdrawn earlier than retirement. There is no provision in the relevant laws to this effect because this situation was not envisaged when the relevant rules were made. At that time, people used to work till retirement with same or one employer, mostly. Now scenario has changed.

  2. Hi Manikaran, this article is really worth a read as special for people like me who have recently entered the industry it’s important to know what all money is been deducted from your salary and how it’s going to benefit you in future.

  3. [email protected]

    Hello Manikaran,
    Thank you for the information. I have been contributing to Superannuation for more than 5 years now. From this year I want to move to NPS.
    1. Can I withdraw my Superannuation funds completely ? If so from when I can withdraw it.
    2. If I have to transfer the Superannuation funds to NPS, then clarify whom should I approach for this step ?
    Thanks,
    Raghu

  4. Nice article. But my doubt is not answered here. I fall in 30% tax bracket. I already have my home. There is no home loan. I am already contributing to NPS 50k. Now employer has asked me if i want to opt for OR out of superannuation. Superannuation gives me fixed 8.3% round abut returns + 1.5 L tax benefits each year. in comparison if i get that 1.5 L in-hand then max return i will get is 12 to 13% from MF SIP. With this comparison which will give better returns? if you have some statistics to support the answer will be really great. Thanks for reverting back soon as i want to revert to my employer for giving superannuation option in 2 days time.

    • Vikas, if there is superannuation then definitely there will be EPF too in your salary structure, which would also be contributing in your 80C savings. If you are financially well planned then you must have bought term insurance policies too which are again part of your 80C savings. If you have school going children then there school expenses can be claimed in 80C savings. So all in all 80c savings is not a concern here.
      Now coming to product returns – You have rightly pointed out the differences in SA and MFs, as 8.3% and 12%, and this is actually huge…and over a long time frame, compounding of returns will create a huge difference in the corpus.
      But the main point is taxation, if you receive superannuation fund in your in hand salary then this will expose the money to taxes and your investible money would be reduced by 30%.
      I think you should better work on your suitable Investible asset allocation first, and design your Investment portfolio. See, if you can fit superannuation amount in the Debt side of the investment. If yes, problem solved.

  5. Dear sir,

    i want to withdraw my Superannuation so tell me what is the procedure?

    if i withdraw is it taxable ? if YES how much rate of interest? pls

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