Most employees keep on planning and restructuring their savings to reap its benefits after retirement, but they are not aware of a benefit that they are automatically eligible to if they are working in a company for at least more than a year. Yes! The employer offers the group superannuation policy or superannuation scheme as a retirement benefit to the employee.
Understanding a group superannuation policy and taxation rules is crucial when availing these benefits. This will enable the employee to wisely plan for his retirement and take decisions of reinvestment or withdrawal accordingly.
Key Takeaways
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The “One-Third” Rule: To maximize tax efficiency at retirement, you are permitted to withdraw 1/3rd of your accumulated corpus as a tax-free lump sum. The remaining 2/3rd must be used to purchase an annuity, which provides your monthly pension.
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Employer Contribution Cap: While your employer can contribute up to 15%, be aware that any employer contribution exceeding ₹1.5 Lakhs per annum is treated as a taxable perquisite in your hands.
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Portability: If you change jobs, your superannuation isn’t lost. You can transfer the balance to your new employer’s fund. If the new employer doesn’t have a scheme, you can keep the fund with the old employer until retirement or transfer it to an individual annuity.
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Defined Benefit vs. Contribution: Most modern plans are Defined Contribution, where the final corpus depends on the investment’s performance. Older plans were often Defined Benefit, where the payout was fixed based on salary and years of service.
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Disability & Death Protections: In tragic circumstances like death or permanent disability, the taxation rules soften. In these cases, the entire corpus can often be withdrawn by the employee or their family tax-free.
Listed below is certain information that employees must be aware of from an early age that surround the superannuation fund created for them by the employer:
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Types of superannuation funds:
There are two types of funds: Defined benefit and Defined contribution.
In the defined benefit fund, the employee can be aware of the contribution that the employer makes to the fund every time. The employee can also offer to contribute a part of his income if he wants to plan his retirement savings wisely.
The contribution fund is the second type of fund. In this, the employee is unaware of the amount that the employer contributes towards it. Employees can verify the approval of their superannuation with the employer and the Commissioner of Income Tax.
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Contribution by the employer:
An employer generally contributes 15% of your basic salary and DA towards your superannuation fund. This 15% is the upper limit and may vary according to factors like your post and years of service.
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Taxation in general cases:
If an employee retires, they can withdraw 1/3rd of the accumulated amount and must convert 2/3rd into a pension. Alternatively, they can purchase a tax-exempted pension product using the entire amount.
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Rule while shifting jobs:
If you shift jobs, then you can either transfer the whole fund account to the new employer or let it remain with the old one till your retirement age. Sometimes, the lack of group superannuation policy scheme with the new employer might lead you to withdraw the whole amount or transfer the whole fund with the previous employer in an annuity account. You can thus reap its benefits later on.
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Taxation on approved superannuation fund:
As mentioned earlier, employees can seek information about the approval status of their fund from the employer. However, if the authorities approve the fund, employees need to be aware of certain rules surrounding it.
- If the employee is contributing to this fund then under the Section 80C of the Income Tax, the contribution up to Rs. 1.5 lakhs is tax-free.
- The employer’s contribution remains tax-free until it reaches the specified limit of Rs. 1.5 Lakhs. If it exceeds this limit, then the contribution becomes taxable.
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The rule states that if you withdraw the total amount at retirement:
If an employee withdraws the whole amount of the Superannuation fund immediately after retirement, then the whole amount will be counted as taxable income. “Income from other sources” will include it, and taxes will be levied on it according to general tax slabs.
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Special tax exclusions:
In case the whole amount of superannuation is withdrawn by the family of the employee in case of his death, such withdrawal will be tax-free. Similarly, in case the employee suffers from permanent total or partial disability caused due to accident at job or otherwise, the same rules would apply for withdrawal.
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Types of annuity schemes:
There are different types of annuity schemes available according to the kind of fund created. Accordingly, the two basic types of annuities are immediate and deferred. With an immediate annuity, employees can begin receiving payments soon after making an initial investment. On the other hand, deferred annuity accumulates the amount for a fixed duration. An employee is eligible to receive the payments after that duration.
So, it is feasible to take a deferred annuity if there is still time for retirement. Contrarily if the retirement age is near, it is better to avail an immediate annuity scheme.
Summary: Group Superannuation Benefits
A superannuation fund benefit is a crucial part of employment. It must not be ignored as it can form the most significant part of savings after retirement.
Frequently Asked Questions (FAQs)
Q1: Can I withdraw the entire superannuation amount when I resign from a job?
A) If you resign before reaching retirement age, you can withdraw the amount, but it will be subject to heavy taxation as “Income from Other Sources.” It is generally recommended to transfer the fund to your new employer to preserve the tax benefits.
Q2: Is the monthly pension (annuity) received after retirement tax-free?
A) No. While the 1/3rd lump sum you take at retirement is tax-free, the monthly pension payments you receive from the 2/3rd annuity portion are considered “Income from Salary” or “Other Sources” and are taxed according to your applicable income tax slab.
Q3: What is the difference between an “Approved” and “Unapproved” fund?
A) An “Approved” fund is one cleared by the Commissioner of Income Tax. Contributions to and withdrawals from approved funds enjoy significant tax benefits under Section 80C and Section 10(13). Unapproved funds do not offer these tax breaks.
Q4: Can I choose which insurance company provides my annuity?
A) Yes, usually at the time of retirement, you can choose from various IRDAI-approved life insurance companies to purchase your annuity. You should compare the “Annuity Rates” to see which company offers the highest monthly pension for your corpus.
Q5: What happens if my new employer does not have a Group Superannuation scheme?
A) You have two main options: (1) Leave the funds with your previous employer’s trust until you reach retirement age, or (2) Transfer the funds to an individual annuity plan, though this may have different tax implications.
About The Author
Trisha
MBA Finance
With seven years of experience in the insurance industry, Trisha is a recognized expert in group superannuation. As a dedicated writer for SecureNow, she crafts insightful blogs and articles that clarify the complexities of group superannuation schemes. She is passionate about educating businesses on the benefits and management of retirement plans, making technical details accessible and practical. Their deep understanding of superannuation regulations and best practices ensures that readers receive up-to-date and valuable information, establishing Trisha as a trusted voice in the insurance community.
