Superannuation - Understanding the Meaning, Working, Types, and Tax Benefits

Did you hear about the superannuation scheme at work and wonder what it’s all about? In simple terms, Superannuation is a smart way to secure your financial future. In a superannuation scheme, both you and your employer contribute towards your retirement funds. This scheme is all about growing your savings over time so that you have a steady stream of income when you retire. The easiest way to describe superannuation is to call it a ‘company pension scheme’.

What is Superannuation? How does it work? And what types of company pension schemes are available? Knowing the answers to all these questions will help you plan for a worry-free retirement. In this blog, we’ll break down everything you need to know about superannuation.

What is Superannuation in India?

Superannuation is a retirement scheme in which both you and your employer contribute funds throughout your career. This accumulated money can help pay for your living expenses in your golden years. Superannuation is a fantastic pension scheme for long-term salaried employees.   

How Does it Work?

Your salary is structured so that 5% of your monthly income is automatically saved into a separate account. Your employer will also contribute an equal or greater amount to further enhance your retirement funds. Note that superannuation is completely optional! You have to opt into this scheme, and you can choose to stop contributing to your funds whenever you want.

Your superannuation funds are invested into various financial instruments, such as stocks, bonds, and government securities. The goal is to grow your funds by the time you wish to retire.

Types of Superannuation Plans

There are two main types of superannuation plans, namely:

1. Defined benefit plans: Here, the retirement benefit is predetermined by the employer and calculated based on various factors. The formula considers the employee’s age, income, salary history, and length of service.

1. Defined contribution plans: In this type, the employer, employee, or both make regular contributions. The employee can choose how to invest the funds and is responsible for any losses.

Types of Annuities Under Superannuation Plan

You can also choose the frequency of your annuity payouts once your superannuation scheme matures. Here are some of the payout options available:

1. Life: This option provides payments for your entire life, ensuring you always have a steady income. These returns, however, cease upon death.

2. Joint: As the name suggests, this option offers coverage for two lives. Typically, you and your spouse will be the payout recipients. Annuity is payable as long as one of the annuitants is alive. Annuity will cease only once both members of the plan have passed away.

3. Certain: Annuity is paid for a fixed period, such as 10, 15, or 20 years, irrespective of whether you’re alive or not. In case of any unfortunate event, payments are given to the beneficiaries.

4. Deferred: Income payments are deferred to a future date. This works best when you are planning to retire later in life, or if you want to reduce your taxable income post-retirement.

When Can You Withdraw the Superannuation Fund?

You can transfer your superannuation funds from one employer to another, withdraw the funds, or keep them in the same old account until retirement. Remember, whenever you withdraw your superannuation fund, the amount will be taxable as ‘Income from other sources.

Are there any tax benefits of the superannuation scheme?

Yes, both employees and employers enjoy certain tax benefits under the Indian Income Tax Act 1961:

• Under Section 36(1)(iv), employers can claim a deduction for contributions made to their employees’ superannuation funds.

• Contributions made by employees qualify for deductions under Section 80C of the Income Tax Act, up to a certain limit per financial year.

• Under Section 10(13), a portion of the withdrawals from the superannuation fund is tax-free. At retirement, you can withdraw up to one-third of the corpus and convert the rest into lifelong annuity, which is also tax efficient.

Conclusion

Now that you understand the benefits of a superannuation scheme, take advantage of the power of compounding and start building your retirement corpus today! With Edelweiss Life Insurance, you can further build your funds with various insurance policies that provide security and stability. So, choose the right instruments and diversify your portfolio to ensure a safe, secure, and financially fulfilling retirement.

 

Aastha Mestry - Portfolio Manager 

An Author and a Full-Time Portfolio Manager, Aastha has 6 years of experience working in the Insurance Industry with businesses globally. With a profound interest in traveling, Aastha also loves to blog in her free time.