Most firms offer a variety of retirement benefits to staff members, either voluntarily or as a result of a legal requirement to keep workers on staff for a longer period. A retirement benefit offered by the employer to the employee is a superannuation fund. Similar to EPF, but with only one employer contributing.
What is a superannuation benefit?
A superannuation plan is a financial benefits programme for an organisation’s staff members till retirement. Another name for it is a firm pension plan.
Your company contributes 15% of your basic pay to this fund. You are not required to contribute as an employee, but you are free to do so. Employers typically purchase group superannuation plans from insurers, keeping your and group accounts active.
Your account is where the capital, interest, and profits from investments in funds are put. Typically, the interest rate is comparable to provident fund rates.
Take superannuation as a lumpsum payment
It should be emphasised that, in the case of defined contribution plans, employees may also choose to contribute additional funds voluntarily. The employee may withdraw up to one-third of the accrued benefit at retirement and convert the remaining portion into a regular pension or invest in mutual fund. The remaining amount is then held in the annuity fund to receive annuity returns at predetermined intervals.
An initial pay out from your retirement plan is a lump sum pension. It offers a sizeable chunk of money that you can utilise to fund your immediate retirement needs, such as starting a new business or taking a family vacation.
How does superannuation work?
The employer contributes to the group superannuation policy they owns on behalf of the employees as a superannuation benefit.
The company must contribute a set percentage of each employee’s base salary and dearness allowance (up to a maximum of 15%), which must be the same for each group of employees. Although the employer contributes, superannuation should ideally be included in the cost to the company (CTC). The employee can transfer the superannuation amount to a future employer if they switch jobs.
Income tax treatment
- Employee contributions are tax-free (under Section 80C of the Tax Act, which caps eligible investments at Rs. 1.5 lakh).
- The interest you earn from the superannuation funds is not subject to tax.
- Employer contributions to superannuation fund up to Rs. 1 lakh are tax-free. Taxes will be applied to any sum beyond Rs. 1 lakh.
- The entire amount will be taxed if an employee wants to take superannuation fund before leaving a company. The sum will be included under “Income from Other Sources” and taxed following the income category to which it belongs. The safest option and to get max tax benefits one should start investing in SIP.
Exceptions over payment of superannuation
Payment of a superannuation sum is not taxable under Section 10(13) in the following situations:
- If the employee’s heirs receive the remuneration after passing
- If the money is made as a contribution reimbursement following the employee’s passing
- If the employee receives the payment as part of an annuity plan following retirement (voluntary or due to an age restriction)
- If the employee receiving the money is unable to work due to a disability, illness, or other circumstances
Conclusion
A common company practice is to include superannuation fund benefits in employee CTC. When switching jobs, many individuals could avail this perk.
Employees who cannot work further may use the money in superannuation accounts. The employee’s family members may also use the funds on retirement or death. When an employee has a medical emergency, the funds help the family members. (https://www.easyvet.com/)