Financial security is vital to spend your post-retirement life in peace and fully enjoy it. This is where retirement planning comes in. There are many ways to plan for retirement but one popular way to go about it is a superannuation scheme.
Superannuation funds allow you to save effortlessly for retirement during your working years.
Most employers provide various retirement benefits to their employees either due to a statutory mandate or voluntarily to retain employees for a longer period. Such retirement benefits include provident fund, gratuity, National Pension System etc. Superannuation benefit is one such retirement benefit offered to employees by their employers.
Many times employees ignore this retirement benefit. In fact, many may not even know that they have been provided with superannuation benefit as the contribution to the benefit does not go out of their pocket. Some may also be unaware of the superannuation amount they are entitled to at retirement. Given this, it becomes imperative to understand what the superannuation benefit is in order to help individuals have better financial planning and plan retirement efficiently
Superannuation Meaning
A superannuation scheme is a pension plan a company or employer offers to its employees. The employer contributes towards a superannuation fund that helps provide steady income to the employee on retirement. Employee contributions are voluntary.
As an employee, you can withdraw your superannuation amount on retirement or under conditions like death, disability or a financial crisis.
Superannuation is also known as a company pension plan. It is an efficient tool through which you can accumulate a significant retirement corpus without tax implications.
How Does Superannuation Scheme Work?
You may also voluntarily contribute to the scheme. If you wish to contribute to the superannuation plan, the amount is deducted from your salary. You must note that superannuation is usually detailed in the employees’ Cost to the Company (CTC).
You can withdraw up to one-third of the accumulated corpus as a lump sum on reaching the superannuation age. The balance is used to provide annuity returns at regular intervals.
You can also transfer the superannuation corpus to your new employer in case of a job switch. The accumulated funds are transferable if the employer offers a superannuation scheme.
If there are no superannuation benefits offered by the new employer, you can keep the amount invested until retirement or withdraw it. However, if you wish to withdraw the accumulated money, it won’t be eligible for a tax exemption.
Types Of Superannuation Benefits
Defined Benefits
A defined benefit plan is a fixed benefits superannuation plan. As the name suggests, the benefits under this plan are already fixed regardless of the contribution amount or the fund’s investment performance.
The calculation of the benefits is done on a predetermined basis. Several factors like your salary, the number of years of employment in the company, age at which you will start receiving the benefits, your position, etc., determine the superannuation benefits.
Since your employer is responsible for the predetermined benefits you will receive under the plan, the terms under which the defined benefits plan operates will be subject to the policy terms and conditions stipulated by your employer and the insurer.
However, it ensures financial certainty as you will receive a predetermined amount at regular intervals. Public sector and government organisations usually provide this type of superannuation benefit.
Defined Contributions
A defined contributions plan on the other hand is the opposite of a defined benefits plan.
While a defined benefits plan has pre-determined and fixed benefits, a defined contributions plan involves fixed contributions. The benefits under this plan are not fixed but rather based on factors like the contributions made, the fund’s investment performance and market fluctuations.
As an employee, you bear the risk of market fluctuations and investment performance. It is a more common superannuation scheme since it is better to manage. However, researching the market dynamics is essential to optimise your returns. A defined contributions plan is usually offered by the private sector and corporate entities.
Types Of Superannuation Plans
Hybrid Plan
As the name suggests, a hybrid superannuation plan is a mix of a defined benefits plan and a defined contributions plan. In this plan, a part of the superannuation benefits is guaranteed and fixed.
The remaining portion of benefits are determined by the market performance of the investment. A hybrid plan is a suitable option if you want income stability while also benefiting from the potential of higher returns.
Employee Choice Plan
Employee choice plan acknowledges that every employee has unique needs, financial objectives and risk tolerance. This superannuation plan allows you to tailor the most suitable retirement plan that suits your financial goals and risk appetite.
In this plan, you can choose between a defined benefits plan or a defined contributions plan. I
If you are a young employee who wants to make long-term market gains, a defined contributions plan can help you achieve your retirement goals. On the other hand, you can choose a defined benefits plan if your retirement is near and you want to ensure income certainty.
Group Superannuation Cash Accumulation Plan
A group superannuation cash accumulation plan is another type of superannuation that works on collective contributions. This plan involves contributions from both employer and employee towards the superannuation fund.
The accumulated cash is then used for investments in multiple financial tools. The market gains and the compound interest let your retirement funds grow. When you retire, you receive the accumulated funds and also the returns from the investments made.
Types Of Annuities Under Superannuation Schemes
Pension for life
Payable for life at fixed intervals of 5, 10 or 15 years
Lifetime pension with a Return on Capital (ROC)
Payable jointly on an employee’s and spouse’s life
Income Tax Benefits Of Superannuation
Like other retirement schemes, a superannuation plan also offers tax benefits to both the employer and the employee. However, the tax benefits are offered on approved superannuation funds.
Let’s discuss the tax benefits of superannuation for the employer and the employee in detail below:
Tax benefits for the Employer
The employer’s contributions towards an approved superannuation fund come under the category of tax-deductible business expenses. Furthermore, the income earned by self-managed trusts of an approved fund is also tax-exempt.
An approved superannuation fund is the one approved by the Income Tax Commissioner. The commissioner approves superannuation funds that meet certain conditions. Since tax benefits are offered to approved funds only, it is crucial to ask your employer if your superannuation fund is approved or not.
Tax benefits for the Employee
The voluntary contributions of an employee towards an approved superannuation fund are eligible for a tax deduction of up to ₹1.5 lakh under Section 80C
The benefits of a superannuation fund received by an employee due to death or injury are also exempt from tax
The superannuation benefits given to the employee after a predefined age including the lump sum withdrawal and the annuity payouts are tax-free
Interest on a superannuation plan is tax-free
Superannuation benefits are exempt from taxation if the employee is unable to work before retirement due to any reason
The amount withdrawn by the employee at the time of a job switch is eligible for taxation under the “Income from other sources” head
Benefits Of Superannuation For The Employer
A superannuation scheme is advantageous not only for the employee but also for the employer. Let’s understand the scheme’s benefit from the perspective of an employer.
Superannuation forms a critical part of competitive compensation packages. The provision of superannuation benefits by an employer reflects the company’s concern about the long-term financial security of its employees.
Hence, superannuation is a good way of attracting a talented and loyal workforce to an organisation. When employees feel their employer is committed to their long-term financial security, they work more dedicatedly and honestly for the company.
Another advantage of providing superannuation benefits to employees is tax benefits. The contributions made by the employer towards the superannuation fund are eligible for tax deductions.
Benefits Of Superannuation For The Employee
Superannuation offers the following benefits to an employee:
Old age Security
One of the prominent benefits of superannuation is old age security. By providing a steady stream of income when you are no longer working, superannuation helps you tackle the uncertainties of old age.
Low Fees
Superannuation plans usually have low fees, which makes them an affordable way of saving for retirement.
Flexible Payouts
Once you retire, you can withdraw a maximum of one-third of the corpus as a lump sum. The remaining portion of the superannuation fund is converted into an annuity.
The lump sum withdrawal can help you tackle emergencies after retirement, while the rest of the annuity can help you manage the day-to-day expenses.
Tax Benefits
Superannuation scheme provides tax benefits too. The contributions towards the superannuation fund are tax deductible. Moreover, the payouts are also tax-free once you reach retirement age.
Employer Contributions
The superannuation scheme involves contributions from the employer who contributes a maximum of 15% of your basic salary to the pension plan. This allows you to save for retirement without actively contributing to the fund.
Portability
You can transfer your superannuation benefits to the new employer in case you change your job. This helps you continue your retirement savings no matter where you work.
Early Access
Another benefit of superannuation is that it allows you to make early and penalty-free withdrawals in case of an illness or injury. This helps you tackle a difficult time without financial woes.
Difference Between Superannuation And Retirement
The terms superannuation and retirement are often used interchangeably. However, both have different meanings.
As discussed above, superannuation is a financial tool set up by an employer of an organisation. It is primarily a fund that receives periodic contributions from the employer or both you and the employer and employee. You can withdraw the accumulated funds on retirement.
Retirement, on the other hand, refers to the end of your professional career after reaching a particular age. It involves a shift from your working years to a phase of rest. You may rely on pension, savings or other sources of income to enjoy your post-retirement life.
Superannuation schemes are one way to financially secure your post-retirement phase of life while retirement is just an act of leaving your job or ceasing to work.
FAQs
What Do You Mean by Superannuation?
Superannuation is an Australian retirement account with two types: one that can appreciate over time and has variable payouts depending on market conditions, and one that has a defined benefit payout system that is not susceptible to market fluctuations.
What Is Superannuation in Salary?
Superannuation is a retirement fund offered by an employer. You and your employer contribute to this fund to help you build enough wealth to fund your retirement.
Practice area's of B K Goyal & Co LLP
Income Tax Return Filing | Income Tax Appeal | Income Tax Notice | GST Registration | GST Return Filing | FSSAI Registration | Company Registration | Company Audit | Company Annual Compliance | Income Tax Audit | Nidhi Company Registration| LLP Registration | Accounting in India | NGO Registration | NGO Audit | ESG | BRSR | Private Security Agency | Udyam Registration | Trademark Registration | Copyright Registration | Patent Registration | Import Export Code | Forensic Accounting and Fraud Detection | Section 8 Company | Foreign Company | 80G and 12A Certificate | FCRA Registration |DGGI Cases | Scrutiny Cases | Income Escapement Cases | Search & Seizure | CIT Appeal | ITAT Appeal | Auditors | Internal Audit | Financial Audit | Process Audit | IEC Code | CA Certification | Income Tax Penalty Notice u/s 271(1)(c) | Income Tax Notice u/s 142(1) | Income Tax Notice u/s 144 |Income Tax Notice u/s 148 | Income Tax Demand Notice | Psara License | FCRA Online
Company Registration Services in major cities of India
Company Registration in Jaipur | Company Registration in Delhi | Company Registration in Pune | Company Registration in Hyderabad | Company Registration in Bangalore | Company Registration in Chennai | Company Registration in Kolkata | Company Registration in Mumbai | Company Registration in India | Company Registration in Gurgaon | Company Registration in Noida | Company Registration in lucknow
Most read resources
tnreginet |rajssp | jharsewa | picme | pmkisan | webland | bonafide certificate | rent agreement format | tax audit applicability | 7/12 online maharasthra | kerala psc registration | antyodaya saral portal | appointment letter format | 115bac | section 41 of income tax act | GST Search Taxpayer | 194h | section 185 of companies act 2013 | caro 2020 | Challan 280 | itr intimation password | internal audit applicability | preliminiary expenses | mAadhar | e shram card | 194r | ec tamilnadu | 194a of income tax act | 80ddb | aaple sarkar portal | epf activation | scrap business | brsr | section 135 of companies act 2013 | depreciation on computer | section 186 of companies act 2013 | 80ttb | section 115bab | section 115ba | section 148 of income tax act | 80dd | 44ae of Income tax act | west bengal land registration | 194o of income tax act | 270a of income tax act | 80ccc | traces portal | 92e of income tax act | 142(1) of Income Tax Act | 80c of Income Tax Act | Directorate general of GST Intelligence | form 16 | section 164 of companies act | section 194a | section 138 of companies act 2013 | section 133 of companies act 2013 | rtps | patta chitta