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What is Supperannuation Fund and what are its tax benifits ?

Most companies offer a variety of retirement benefits to their workers, either voluntarily or as a result of a legal requirement to keep workers on staff for longer periods of time. A provident fund, the National Pension System, and other incentives are examples of such retirement benefits. One such retirement benefit provided to employees by their companies is superannuation.


Employees regularly neglect this retirement benefit. Because they did not actively contribute to it, many people might not even be aware that they received a superannuation benefit. Some people may not be aware of the amount of superannuation they are entitled to when they retire. Given this, it is critical to comprehend the superannuation benefit in order to guide people in making wiser financial decisions and successfully preparing for retirement.


What benefits do superannuation plans provide?

Resigning due to advanced age or a physical handicap is what "superannuation" or "superannuate" mean according to the dictionary. A retirement benefit provided by an employer to its working class is known as a superannuation benefit. A company establishes superannuation as an organisational pension plan for the benefit of its employees. Another name for it is a firm pension plan.


many benefits of superannuation

Based on investments and benefits, superannuation benefits in India are divided into the following groups:


Plans with a defined benefit—As the name implies, the benefit received under these types of superannuation is fixed and unaffected by the contributions of plan participants. The pre-set benefit is decided by a number of variables, including the age at which the recipient begins receiving benefits, their wage, and the length of time they have worked for the organisation. The employer takes on the risk of offering this benefit due to its intricacy. When an eligible employee retires, they will receive a set payment on a regular basis based on the pre-established formula.

defined contribution plans — This superannuation benefit is defined contributions as opposed to a plan with defined benefits. Defined contribution plans have a fixed contribution and a benefit that is directly tied to the contribution and market forces, as opposed to defined benefit plans, which have a fixed contribution and a benefit that is fixed and predetermined. When an employee is unsure of his retirement income, this type of benefit is easier to handle.

What are the steps involved in superannuation?

The employer contributes to the group superannuation policy he owns on behalf of the employees as a superannuation benefit.


The product is either purchased from insurance companies, like the New Group Superannuation Cash Accumulation Plan from LIC or the Endowment superannuation plans from ICICI, or it is managed by the organisation itself through one of its own superannuation trusts, a superannuation benefit fund established with any of the authorised insurance companies, or both.


A predetermined percentage of each employee's base pay and dearness allowance must be contributed by the company (up to a maximum of 15%), and this percentage must be the same for each group of workers. Even when the employer contributes, superannuation should ideally be taken into account when calculating the cost to the business (CTC).


The fact that employees might choose to voluntarily contribute extra money to defined contribution plans should be emphasised. The employee may convert the remaining earned benefit into a conventional pension after taking up to one-third of it at retirement. To receive annuity payments at predetermined intervals, the remaining amount is then held in the annuity fund.


In the event that the employee changes jobs, he has the option of transferring the superannuation amount to the new employer. The employee has two options if the new workplace does not offer a superannuation plan: withdraw the money now or wait taking them out till retirement as previously suggested.


available annuity kinds

Typical annuity choices include:


Lifelong payment, Lifetime payable with a capital return, Paying jointly on the lives of a husband and wife, payable for life with a guarantee of five, 10, or fifteen years.

the benefits of income taxes

Like any retirement benefit, superannuation benefits offer income tax advantages to both the employer and the individual. Unfortunately, these advantages are only available to authorised superannuation funds. According to the rules outlined in Part B of the Fourth Schedule of the IT Act, the Commissioner of Income Tax must grant this authorization.


Employer contributions to approved superannuation funds are deductible as business expenses, and self-managed trusts of approved superannuation funds are excluded from paying taxes on any income they earn.


About the Employee


Employee payments to an authorised superannuation fund are deductable up to a maximum of Rs 150,000 under Section 80C.

At the time of a change in employment, the employee's withdrawals, if any, are taxable under the "Income from other sources" heading.

In the event of a death or injury, any superannuation fund benefit received is tax-free.

Interest earned by a superannuation fund is tax-free.

After retirement, one-third of the commuted fund is completely tax-free; the remaining two thirds are tax-free if transferred to an annuity; the remaining three quarters are taxable to the employee if withdrawn.

For employees making up to Rs. 1.5 lakh, employer contributions are not included. If the donation reaches Rs 1.5 lakh, the surplus will be taxed as a perk in the employee's hands.

the most recent adjustment disclosed in the 2020 budget

According to the present guidelines of the income tax statute, any contribution made by an employer for or on behalf of an employee to a recognised provident fund that exceeds 12% of the employee's salary is taxable. Additionally, the employee considers any employer contributions over Rs 1.5 lakh made to an authorised retirement fund to be a benefit.


Corresponding to this, the employee is permitted to deduct 10% of the salary payments made by any additional employers and 14% of the Central Government's salary contributions under the National Pension Plan (NPS). Yet, the amount of employer contributions that an employee might receive was uncapped.


The employer's yearly contribution to NPS, RPF, and retirement funds has a combined maximum limit of Rs 7.5 lakh, according to the budget 2020, which was released on February 1st, 2020. So, any contribution made by the company above Rs 7.5 lakh will be taxed in the employee's hands as a perk. The interest, dividends, or any other revenue accumulated on such funds or sums in the financial year will also be recognised as a perquisite to the extent that it corresponds to the employer's contribution, which is added to his overall income.

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