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What is Superannuation Scheme & How It Works?

  • Posted By SuperCA
  • On 24 May

What is Superannuation Scheme & How It Works?

Nowadays, almost all employers avail their employees with a lot of retirement benefits like gratuity, provident fund, pension system, etc. Superannuation Scheme is also one such retirement benefit that is offered to the employees.

However, this benefit is often ignored by the employees and many employees have no idea as to what superannuation scheme means and how it works. That is why, it is quite important to understand the superannuation scheme and its benefits, so that the employees can enjoy better financial goals and security.


How is Superannuation scheme beneficial?

The exact meaning of the word ‘superannuation’ is retirement due to age or infirmity. A superannuation scheme is a benefit that is fruitful at the time of retirement and is offered to the working employees by the employer. Superannuation scheme is more like a pension program devised by a company for the benefit of its employees. This is also known as a company pension plan.


The different types of Superannuation scheme benefits

On the basis of investment and benefits of the Superannuation scheme, the benefits are of two types as listed below:

  • Defined Benefit Plans: Just as the name suggests, the benefit in this plan is already fixed irrespective of the amount contributed to the plan. The pre-decided benefit is based on a multitude of factors such as: the tenure of service in the company, salary of the employee, the age at which the employee starts to use the benefit and more. This type of benefit plan is quite complicated and risky for the employer. At the time of retirement, an employee who is eligible for the benefit plan will receive a fixed amount that was pre-determined at regular intervals of time.
  • Defined Contribution Plans: This type of superannuation scheme benefit plan is quite opposite to the defined benefit plan. In case of a defined benefit plan, the amount to be received by the employee is fixed and pre-decided, however, in the case of defined contribution plan, a fixed amount of contribution is set and the benefit amount is directly related to the contributions and the forces present in the market. This benefit is better and easy to manage and the risk lies with the employee because he is unaware of the amount that he will receive at the time of retirement.


Working of the Superannuation Scheme

In the superannuation scheme, the contribution is made by the employer on behalf of the employees. These superannuation scheme benefit funds are either managed by their own trusts or they open a superannuation fund with an insurance company that has been approved or they buy products from insurance companies like the ICICI’s Endowment plans for Superannuation.

The employer has to deposit/ contribute a fixed percentage of the basic pay and the dearness allowance of the employees and the percentage for contribution for a particular category remains the same. Superannuation scheme comprises the Cost to Company(CTC), even though the contributions are made by an employer.

However, if an employee wants to contribute any sort of additional amount to the superannuation scheme fund, then he can do so if the benefit plan is a defined contribution plan.  Once you retire, you are permitted to withdraw 1/3rd of the total benefit that is accumulated and this benefit can also be converted into a regular pension plan.

Moreover, in the case of an employee leaving the job, he gets the option to transfer his superannuation scheme amount to his new employer. But, if the new employer does not use a superannuation scheme then the employee can either decide to withdraw the amount or he may retain the benefit amount in the fund till he gets retired.

Income tax benefits of Superannuation scheme

The government provides income tax benefits to all the retirement benefit schemes. The Superannuation Scheme also has some benefits over income tax for both the employee and the employer. But these income tax benefits are valid only if the superannuation fund is approved. The approval can be acquired from the Income Tax Commissioner according to the rules which are set in the Part B of the IT Act’s Fourth schedule. Let us understand these tax benefits for both the employee and the employer.

For the Employee:
  • The contribution of any employee to the approved fund of superannuation scheme is deducted under the Section 80c and the overall limit is Rs. 150,000.
  • When an  employee changes his job and withdraws an amount from the superannuation scheme fund, then it is placed under “Income from other sources.”
  • The benefits acquired at the time of earth or some injury by someone from the superannuation scheme fund are tax free.
  • The Interest from the superannuation scheme fund is fully tax-free.
  • At the time of retirement, 1/3rd of the total fund is totally exempt from any tax while the remaining benefit is transferred to a tax-free annuity.
  • Also, the contribution of an employer with respect to an employee is tax-free up to Rs. 1.5 lakh. But if the contribution exceeds this finalised amount, then the excess amount will be taxable for the employee.



For the employer:

If an employer contributes to any superannuation scheme fund that is approved by the income tax department, then the contribution is a business expense that is deductible. Also, any income made by a trust of a superannuation scheme fund that is self-managed is also free from any sort of taxes.