What is Superannuation? How it works, Types and Tax Benefits

Superannuation

Hey, haven’t you heard the term “Superannuation” earlier? Well, it’s not that complicated. Superannuation is just a fancy word for pension plans. In this type of scheme, your employer will make a regular contribution and that amount will be invested in various financial instruments to produce a stable income. Being an employee you can also contribute to the same fund but before retirement, you won’t be able to touch it.

This plan is ideal for those who want to live their life in their way once they stop working. But wait, what about the tax benefits? Yes, superannuation will provide you with some amazing tax perks, not only for the employees but also for the employers.

Wanna know more about this? Let us clear your concept first by sharing how it works. The types and most importantly the tax benefits. So let’s jump in,

How Does Superannuation Work

Superannuation or super is one of the most demanding retirement plans for all employees. With the help of compounding employees can experience exponential growth at the time of breaking the scheme. Some employers have their trust to prove these benefits to the employees but most organizations are tied up with asset management companies or insurance companies.

EPS ((Employee Provident Fund) and NPS (National Pension Scheme) are the two government-supported pension schemes but aside from this Endowment Superannuation plans or Superannuation Cash Accumulation plans can be also availed by employers.

There are 4 steps on how this works.

Step: 1

When you are an employee of a company, your employer should invest up to 15% of your basic pay and dearness allowance (DA). This percentage is known as the superannuation guarantee. As your employer is contributing to your retirement plan, it will automatically form a portion of the employee’s total CTC. 

Step: 2

As an employee, you can also invest in your superannuation plan. It will help you to boost your savings and also serve your tax advantages.

Step: 3

The investments are distributed into various asset classes, and with the help of market performance and the power of compounding, retirement plans provide unexpected returns.

Step: 4

To access your superannuation plan, you need to reach the preservation age first. Generally, the age is between 55 to 60. After that, you can break it and get a lump sum, or you can also choose a regular pension option.

As an example, you got a job at the age of 25 and your basic salary is INR 30,000 per month. Now your employer will deduct 15% from your basic pay for this retirement scheme, so it becomes 4,500 rupees. Until you reach the preservation age, that amount will be constantly deducted. To get an estimate of the savings, you may also use the retirement calculators.

Types Of Superannuation

There are 2 types available. These are,

Defined Benefit Plans

In this plan, the pension amount is predetermined, and it will be based on employee salary, age, and employee vintage. A fixed pension is guaranteed by the employer after retirement irrespective of market returns. The only con of this type of superannuation plan is calculating the returns becomes a little tough as it all depends on the employer.

Defined Contribution plans

This type of superannuation plan pension depends on total contributions made and market returns. However, these plans are a little riskier due to their dependency on the market. Therefore, the beneficiary can not be sure about what exact amount they will receive after retirement.

Tax Benefits Of Superannuation 

The perks related to tax should be divided into two sections for superannuation schemes because it is not only beneficial for the employees but also for the employers. Let’s have a quick check first,

For Employers

• When an employer contributes to a superannuation fund to help the employees save for retirement they also get benefitted because it reduces overall business tax liabilities for the employers. 
• In case of excess contribution of over 7.5 lakhs will be liable for tax. 
• Employers are always eligible for this deduction and it comes under section 36(1)(iv). 

For Employees 

• When an employee wants to change jobs and withdraw the amount is always taxable. 
• When the contribution of the employer to the employee’s company pension plan crosses 1 lakh then it will be taxable under the hand of the employee.
• According to the notice of the central government, through the time of transferring an employee’s account into a pension scheme, tax can be exempted.
• Under section 80C the limitation is 1.5 lakh for the employers to contribute to employees’ superannuation plans.
• Under section 10(13), tax can be exempted if a person gets a lump sum after retirement, death, or termination, but there is some T&C as well.
• From an approved company pension plan, if you receive an accrued interest it will be always tax-free. 

Wrapping Up

In today’s generation, superannuation has become one of the primary criteria for the employees before joining any organization or switching jobs. Initially, it might not excite you but when you think deeply you’ll understand the importance of stabilizing your future when you stop working. Moreover, you get a chance to save tax as this fund is tax-free to a certain limit under the IT Act section 80C. So just take a moment, look at your super, calculate the returns, and then make your decision.

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