What are superannuation schemes? Types and key advantages

Superannuation schemes stand out as an effective vehicle for retirement savings. In India, where the concept of retirement planning is still evolving, understanding superannuation can give you a significant advantage in preparing for your golden years. Read on to understand the intricacies of superannuation schemes to help you make informed decisions about your financial future.

• Table of contents

1. Superannuation meaning
2. Types of superannuation
3. The working of superannuation schemes
4. Income tax benefits of superannuation
5. Superannuation vs retirement

Superannuation meaning

Superannuation is more than just a fancy term for retirement savings; it's a structured approach to ensuring financial security in your post-work life. At its core, superannuation is an employer-sponsored pension program designed to provide you with a steady income stream after you hang up your work boots.

Think of superannuation as a corpus gathered throughout your working years. Your employer contributes a portion of your salary – typically up to 15% of your basic pay – into a designated fund. This fund grows over time, accumulating interest and potentially benefiting from smart investment strategies.

What sets superannuation apart from other retirement savings options is its systematic nature. Unlike ad-hoc savings plans, superannuation ensures a consistent contribution towards your retirement corpus, leveraging the power of compound interest over the long term.

Types of superannuation

Accumulation funds

Accumulation funds are the workhorses of superannuation schemes. In this type, your contributions and those of your employer are invested in a diversified portfolio. The final payout depends on the performance of these investments over time. It's akin to having a personal investment manager working tirelessly to grow your retirement nest egg.

Defined benefit funds

Defined benefit funds offer a more predictable retirement income. Here, your payout is predetermined based on factors like your salary history and years of service. This type provides a sense of security, as you know exactly what to expect upon retirement.

Hybrid funds

Some superannuation schemes blend elements of both accumulation and defined benefit funds, offering a balanced approach to retirement savings. These hybrid funds aim to provide the growth potential of accumulation funds while maintaining some of the predictability of defined benefit plans.

The working of superannuation schemes

1. Contributions: Your employer makes regular contributions to your superannuation fund, usually calculated as a percentage of your basic salary. You may also have the option to make voluntary contributions to boost your retirement savings.
2. Investment: The fund manager invests these contributions in a mix of assets, which may include stocks, bonds, and other financial instruments. The goal is to grow your corpus over time through strategic investments.
3. Accumulation: As you progress in your career, your superannuation fund continues to grow, benefiting from both ongoing contributions and investment returns.
4. Vesting: Many superannuation schemes have a vesting period, during which you become entitled to the employer's contributions. This period can vary but typically ranges from 3 to 5 years of continuous service.
5. Withdrawal: Upon retirement, you have options for accessing your superannuation funds. You can typically withdraw up to 25% of the accumulated amount tax-free, with the remaining 75% used to purchase an annuity for regular income.
6. Portability: If you change jobs, you often have the option to transfer your superannuation benefits to your new employer's scheme, ensuring continuity in your retirement planning.

Income tax benefits of superannuation

One of the most attractive aspects of superannuation schemes is their tax efficiency. These plans offer several tax advantages that can significantly boost your retirement savings.

1. Employer contributions: Your employer's contributions to your superannuation fund, up to Rs. 1.5 lakh per annum, are tax-exempt. This means a substantial portion of your retirement savings grows tax-free.
2. Employee contributions: If you choose to make voluntary contributions to your superannuation fund, these can be claimed as a deduction under Section 80C of the Income Tax Act, up to a limit of Rs. 1.5 lakh per year.
3. Interest accrual: The interest earned on your superannuation fund investments is not taxable during the accumulation phase. This allows your corpus to grow more rapidly over time.
4. Withdrawal benefits: Upon retirement, you can withdraw up to one-third of the accumulated amount tax-free. The remaining two-thirds, when used to purchase an annuity, is also tax-exempt at the time of receipt.
5. Special circumstances: In cases of disability or critical illness, withdrawals from your superannuation fund are entirely tax-free.

Read Also: Income tax slabs: How will mutual funds help you to save tax

However, it's important to note that there are some limitations to these tax benefits. For instance, employer contributions exceeding Rs. 7.5 lakh per annum (combined limit for NPS, RPF, and Superannuation fund) are now taxable as perquisites in the hands of the employee.

Superannuation vs retirement

While often used interchangeably, superannuation and retirement are distinct concepts that are closely interrelated. Understanding the nuances between the two can help you better plan for your financial future.

Superannuation refers specifically to the financial instrument or fund designed to provide income during retirement. It's a structured savings plan, often employer-sponsored, that accumulates funds throughout your working years. Think of superannuation as the vehicle that carries you towards your retirement goals.

Retirement, on the other hand, is the broader concept of leaving the workforce, typically due to age. It's a life event that marks the transition from active employment to a phase where you rely on savings, pensions, and other income sources. Retirement is the destination, while superannuation is one of the means to reach it comfortably.

Here's a quick comparison to highlight the differences.

Superannuation	Retirement
A financial instrument	A life event
Focuses on accumulating funds	Marks the end of active employment
Typically involves employer contributions	Can be funded through various sources
Has specific tax implications	Overall financial status changes
Begins during employment	Occurs at the end of one's career

Conclusion

Ultimately, superannuation is more than just a savings plan - it's a commitment to your future self. By leveraging the benefits of superannuation schemes effectively, you're not just saving for retirement – you're investing in peace of mind and financial freedom in your golden years.

FAQs:

Is superannuation taxable in India?

Superannuation in India enjoys several tax benefits, but it's not entirely tax-free. Here's a breakdown,

• Employer contributions up to Rs. 1.5 lakh per annum are tax-exempt.
• Employee contributions are eligible for tax deduction under Section 80C.
• Interest accrued on the superannuation fund is tax-free.
• Upon retirement, one-third of the withdrawn amount is tax-free.
• However, employer contributions exceeding Rs. 7.5 lakh per annum (combined limit for NPS, RPF, and Superannuation fund) are taxable as perquisites.

Can I withdraw my superannuation after 60?

Yes, you can withdraw your superannuation after reaching the age of 60. Typically, you're allowed to withdraw up to one-third of the accumulated amount tax-free. The remaining two-thirds are usually used to purchase an annuity for regular income.

What is the retirement age for superannuation?

The retirement age for superannuation in India typically aligns with the standard retirement age, which is usually 58 to 60 years in most organisations. However, this can vary depending on the company's policies and the specific terms of the superannuation scheme.

What is the meaning of superannuation fund?

A superannuation fund is a pension program created by an employer for the benefit of its employees. It's designed to provide financial security during retirement by accumulating contributions made by the employer (and sometimes the employee) over the course of the employee's working years.

What is the simple definition of superannuation?

In simple terms, superannuation is a retirement benefit system designed to help employees save for their post-retirement life. It involves regular contributions from employers (and sometimes employees) into a fund that grows over time through investments, providing a financial cushion for retirement.

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