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

superannuation fund benefit in india

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. (Also Read: How to manage the post retirement income flow – bucketing strategy)

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. (Read: EPF withdrawal rules)

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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33 COMMENTS

  1. SA is ‘contributed’ by the employer and Section 80-C is applicable for employees / tax payers and not for the employers/tax deductors.
    And therefore, to my knowledge, there is no mention of SA under section 80-C anywhere.

  2. Hi Manikaranji,
    My new Employer has Superannuation(around INR 8000), that is part of my CTC.I am having one query Suppose i leave that organization after 2 years then i am eligible to withdraw my entite Superannuation amount ,and it is taxable.

    I wanted to know also , we get any interest also every year on Superannuation amount.

    Regards
    Kumar

  3. Hello Manikaran,

    Could be a basic question.

    Will there be any employer individual contribution towards employee Superannuation? like how they do for PF contribution (Employee+Employer contribution).

    Thanks, Hari

  4. Hi I understand Superannuation contribution by Company is not taxable upto 1 lakh per annum. Any amount over and above Rs. 1 lakh is taxed. Further upon withdrawl, I am told the entire amount (P + I) is taxed. My query is: My employer has been contributing more than Rs. 1 lakh p.a towards my SA and corresponding incremental amounts (above Rs. 1 lakh) have been duly taxed. Now when I withdraw, do I need to pay tax on the entire withdrawn amount or can I claim exemption for the amount of tax already paid against the incremental contributions

    • I believe you have to pay tax on both sides. i.e. on deposit above Rs 1 lakh by your employer as Income from salary and at the time of withdrawal even on the employer contribution amount. Still, better to check up on a good CA expert in Salary related tax issues

  5. Sir,
    My structure is under the superannuation scheme. However my company missed paying the super annuation due to certain difficulties. Now they are saying that they will pay the amount missed out with Tax amount as taxable in my hands. Total amount is app 50000 x 5 years=2.5 lakhs. Tax slab is 30%.
    They are suggesting to take nps. What can you suggest in my case. Should the compensation amount be more. Should i take nps from the present year and should i look for a tax compensation as this will be treated as income.

  6. Hi Sir, I have chosen superannuation in My Company and on the company website its shows enabled from 2012…it also shows total value.
    However I didnt get any statement from ICICI. I leaving company in few months and will join another company.
    What to do?

  7. Hi,
    How is the pension calculated for LIC superannuation. Lets say at the time of retirement, my account has corpus of 1 crore. I withdraw 1/3rd so the pension balance is 66 lacs. Now how much pension I will get monthly?

    • The idea on the pension amount can be gained from LIC Jeevan Akshay plan. This is the immediate annuity plan which is used to make pension arrangement for Investors. At the time of maturity whatever is left post commutation, that money be parked in LIC Immediate annuity and you will get pension at the then rates prevailing.

  8. can i change my superannuation plan as i wrongly selected plan. As i want 1/3 amount withdrawal and 2/3 amount will be give to policy for 5 years

    • I think yes. Since the distribution will happen only on maturity and you could be able to change the maturity options.

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