It is a retirement benefit offered by the Employer. Companies create a superannuation fund with insurance companies like LIC, ICICI, SBI or any approved superannuation fund etc. It is not a mandatory benefit. The employer can choose to provide superannuation for his employees.

An approved superannuation fund is a fund that is approved by the Commissioner of Income Tax. Tax exemptions are available only to approved superannuation funds.

Employer needs to contribute maximum 15% of the salary (Basic + DA) in Superannuation fund. The employer can contribute lesser than 15 % also. This contribution is invested by the Fund in various securities as per the guidelines set in the policy

An employee can also voluntarily invest in the superannuation scheme. His contributions shall be liable to tax exemption as per section 80C.

Sometimes companies extend the Superannuation benefits only to a specific grade employees’ e.g Managers and above.

If an employee resigns and joins another company then he can move the superannuation fund to the new company. If the new company does not have superannuation, then the employee can withdraw the amount. This amount would be taxable.

If an employee leaves the organization before attaining Retirement, then the employee can withdraw the entire amount in lump sum. This amount is fully taxable.

On attaining the retirement age, the employee is permitted to withdraw 1/3 of the balance available in his/her account as a tax free benefit.

The balance 2/3 is put in a annuity fund, and the agency (eg LIC) will pay the member a monthly/quarterly/periodic annuity returns depending on the option exercised by the member.

Note :

  • Employer’s contribution in excess of Rs 100,000 is treated as a perquisite in the hands of the employee under.
  • The employer cannot stop contributing to the superannuation trust , once it is formed is formed. Contribution can only be stopped once the trust is closed.
  • Payment of superannuation amount is not taxable under the following circumstances:
  • If the payment is made after the death of the employee to their heirs.
  • If the payment is made to an employee who is incapacitated by a disability or illness or other reasons.

There are two types of superannuation benefits:

Defined Benefit

The benefit is fixed and known to employees. They generally have a formula like last drawn salary, service years etc. These are more popular among the employees, since regardless of their contribution to the plan they are entitled to the pension.

Defined Contribution Plans

These schemes are better to manage as the final benefit is directly correlated with the contributions by employers and employees. The scheme only defines the contribution of both and leaves the outcome to the market forces. Most of the modern pension schemes are defined contribution plans.