Understanding Superannuation benefits: What It Means and How It Works?

What are Superannuation Benefits? How Does Superannuation Works? Read this article to know more

Benefits of Superannuation

Retirement is an important part of life that everyone should plan for. A superannuation scheme is one way to help people save for their retirements. It is a pension provided by companies to their employees as part of their total remuneration package. This article discusses the advantages and disadvantages of superannuation for both employees and employers.

What is Superannuation? What is the meaning of Superannuation?

Superannuation is a set of benefits provided to employees by companies upon retirement, such as provident fund and gratuity. However, many employees are not aware of these benefits as they are often collected by the company and not directly taken from the employee's salary. While some companies offer superannuation benefits solely funded by the employer, others deduct a portion of the employee’s salary and add it to the superannuation fund, resulting in contributions from both the employee and employer. The terms 'superannuation' and 'company pension plan' are often used interchangeably as they both refer to a retirement plan provided by companies to fulfil legal requirements or retain staff for an extended period.

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Working of Superannuation Scheme

Employers contribute a fixed amount to their employees' superannuation accounts, which are managed by the company's trust or an insurance company approved by PFRDA. The employer contributes a fixed percentage of the employee's basic pay and dearness allowance to the superannuation fund, which is deducted from the employee's salary. The employer can contribute up to 15% of the basic pay to the superannuation fund, but whether or not to allocate money to this program is a personal decision for the employee.

Employers purchase group superannuation plans from insurance companies to help employees with expenses after retirement, even though the monthly contribution may seem small. The accumulated amount can be significant over time. If an employee changes jobs, they have the option to transfer their superannuation fund to their new employer. In case the new employer doesn't offer a superannuation plan, employees can choose to withdraw the fund or leave it in the account until retirement.

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Categorizing Superannuation Benefits

  • Defined Benefits Plan: Benefits under this type of fund are fixed and independent of the amount contributed to the scheme. Factors such as the duration of employment, salary, and the age at which benefits begin are taken into account for the pre-determined amount. The employer assumes the risk of providing this compensation, and if eligible, you will receive a fixed sum at regular intervals after retirement, as determined by a pre-established formula.
  • Defined Contribution Plans: A defined contribution plan is the opposite of a defined benefit plan. Contributions are fixed, while the benefit is determined by those contributions and market forces. This type of retirement plan is easier to manage, though the employee takes on the risk of not knowing how much they will receive after retirement.

Superannuation Tax Benefits

Employers and employees both benefit from the tax savings offered by the superannuation scheme, as specified in the Income Tax Act of 1961. For organizations to be eligible for superannuation benefits, their superannuation pension scheme must be approved by the Commissioner of Income Tax.

Tax Benefits for Employers

The employer's contribution towards obtaining approval for the superannuation fund is considered a business expense and can be deducted. Any income earned by self-managed trusts of an approved superannuation fund is tax-exempt. However, if the employer contributes more than ₹1,00,000 in respect of any employee, it is considered a taxable perquisite.

Tax Benefits for Employees

Superannuation funds offer tax benefits for employees, such as deductions under Section 80C with a limit of ₹1,50,000, tax exemption for payments made to employees after a certain age, and tax-free benefits in the event of death, injury, or inability to work. Additionally, employees can also avail of tax exemptions by transferring their account to a pension scheme notified by the Central Government under Section 80CCD.

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Superannuation funds are an essential aspect of an employee's compensation package. They provide a sense of security and financial stability for employees in their retirement years. Superannuation funds are a win-win for both employees and employers, as they provide long-term financial benefits for employees and attract and retain talent for employers.


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