The tax structure and benefits available with Superannuation Schemes in India is as follows:
Tax on Contribution to Superannuation Fund
An employee’s contribution to the superannuation fund is exempted from tax up to Rs. 1.5 Lakh (for F.Y. 2016-17) under section 80C. Interest accrued on the superannuation fund investment is not taxable.
Employer’s contribution to the superannuation fund of an employee is exempt up to Rs. 1.5 Lakh. Any amount which is above the limit of Rs. 1.5 lakh is considered income of the employee in the year it has been made.
Key Takeaways
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The ₹1.5 Lakh Threshold: For both the employer and the employee, the magical number is ₹1.5 Lakh. Any contribution by the employer beyond this limit is treated as taxable salary in the hands of the employee for that year.
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The “Lump Sum” Choice: Upon reaching retirement, you aren’t forced to take all the money as a pension. You can take 1/3rd (33.3%) as a tax-free cash payout. The remaining 2/3rd must be used to purchase an annuity plan to provide a monthly pension.
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Early Withdrawal Penalty: If you resign and withdraw the fund before the retirement age (usually 60), you lose the tax benefits. The entire amount is added to your income for that year and taxed as per your slab.
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Employer’s Tax Benefit: For companies like K.S. Infotech, contributions to an “Approved Superannuation Fund” are treated as a business expense, reducing the company’s overall corporate tax liability.
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Protection Against Disability: As highlighted by the HR Manager’s case, superannuation isn’t just for old age. If an employee suffers a permanent disability or a critical illness, the payout is tax-exempt, providing a crucial financial cushion when earning capacity is lost.
Tax on Withdrawal from Superannuation Fund
Upon retirement, the employee has two options:
(1) Withdraw 1/3rd of the accumulated amount, and 2/3rd must be converted into annuity, or
(2) Buy the pension product with the entire amount, which is tax-free for an employee.
If an employee withdraws their superannuation fund at the time of resigning from a company (but before 60 years of age), the tax will be levied on the entire amount.
However, there are certain exceptions to this rule, as per the following:
- The legal heirs receive the payment after the employee’s death.
- An employee receives the payment as an annuity plan after their retirement (voluntarily or due to age limit).
- An employee who is disabled or suffering from critical illness receives the payment.
- Contributions made before 1st April 1962 are tax-free
Click here to know what is superannuation benefit in India
Case Study – Tax Benefits in Superannuation Schemes
Founded in 1999, K.S. Infotech is one of the leading IT companies in Pune. The company has subscribed to an approved superannuation fund for its employees where it is regularly contributing to the fund. As it is not mandatory for employees to contribute, it is the company alone which is making a contribution. The company has bought the superannuation plan from one of the public-sector insurance companies.
Besides motivating employees, superannuation fund also helps K.S. Infotech in saving their taxes. The contribution made by the company enjoys tax benefits as per the Income Tax Act. Two months back, three software engineers left the company and withdrew their superannuation fund. As per the law, the tax was levied on the withdrawal amount.
Summary: Superannuation Tax Structure (2026)
In 2012, the HR manager of the company Mr. Rajesh Singh, met with an accident when his motorcycle hit the truck coming from the other side. Due to the collision, Rajesh became disabled. At that time, he received a tax-free superannuation payment to support his family.
In conclusion, it is essential to explore and understand the tax benefits available with Superannuation Schemes in India to make informed decisions and maximize the advantages they offer. With the right strategy and awareness of the tax implications, individuals can effectively utilize Superannuation Schemes as a valuable tool for long-term financial planning and tax optimization.
Frequently Asked Questions (FAQs)
Q1: If I change my job, can I transfer my Superannuation balance?
A) Yes. Most approved funds allow you to transfer your balance to the new employer’s superannuation scheme. This is highly recommended to avoid the heavy tax burden of an early withdrawal and to keep your “Retroactive” service period intact.
Q2: Is the monthly pension (Annuity) I receive after retirement tax-free?
A) No. While the 1/3rd lump sum you take at retirement is tax-free, the monthly annuity payments are treated as salary/income and are taxed according to your income tax slab in the year you receive them.
Q3: What happens to the fund if the employee passes away before retirement?
A) If the employee dies, the entire accumulated amount (contributions + interest) is paid out to the legal heirs or nominees. This payout is completely tax-free and acts as a life insurance benefit.
Q4: Can I contribute more than ₹1.5 Lakh to my Superannuation fund?
A) You can, but any amount above ₹1.5 Lakh will not qualify for a deduction under Section 80C. Similarly, if your employer contributes more than ₹1.5 Lakh, the excess is added to your taxable income as a “perquisite.”
Q5: Is it mandatory for every company in India to provide Superannuation?
A) No. Superannuation is a voluntary benefit offered by employers to attract and retain talent. However, once a company establishes an “Approved Superannuation Fund,” it must follow the tax and regulatory norms set by the Income Tax Department and IRDAI.
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.
