The tax structure of group superannuation scheme is as follows:
Tax on Contribution to Superannuation Fund
An employee’s contribution to the group superannuation fund is exempted from tax up to Rs. 1.5 Lakh (for F.Y. 2018-19) under section 80C. Also, interest accrued on the superannuation fund investment is not taxable.
Employer’s contribution to the group superannuation plan of an employee is exempt up to Rs. 1 Lakh. Any amount which is above the limit of Rs. 1 lakh is considered the income of the employee in the year and will be taxable.
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 the 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 as the amount will be considered as ‘Income from Other Sources’.
However, there are certain exceptions to this rule, and tax will be exempted for the following cases:
- If the payment is made to the legal heirs after the employee’s death
- If the payment is made to an employee as an annuity plan after their retirement (voluntarily or due to age limit)
- If the payment is made to an employee who is disabled or suffering from critical illness
- Contributions made before 1st April 1962 are tax-free
Founded in 1999, K.S. Infotech is one of the leading IT companies in Pune. The company has subscribed to an approved group 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 As per the law, the tax was levied on the withdrawn amount.
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, annuity payment was made from the group superannuation plan to support his family and the whole amount was tax-free.