Superannuation – Income Tax

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Superannuation – Income Tax

A superannuation plan is a monetary compensation plan to benefit employees of an organisation after retirement. A pension plan is another name for a superannuation fund. Funds deposited in a superannuation account will grow without any tax implications until retirement or withdrawal. Like a provident fund, the superannuation fund is also a scheme of retirement benefit for the employees. An employee can make use of the funds in a superannuation account at times of incapability to continue work. The family members of the employee can also deploy the funds on retirement or death. The funds support the family members when the employee faces a medical emergency. In this article, we look at various features and tax-saving benefits connected with superannuation.

Features of Superannuation

A scheme of superannuation serves the employees at the time of their retirement. The following are some of the major features of superannuation:

  • The employer deposits the funds for the purpose of paying off the pension fund for the employee.
  • The employee obtains a right to utilize the funds when the employee reaches a stipulated age limit which deems the person to be eligible for superannuation. Once termed superannuated, the employee can draw benefits from the fund.
  • As a defined-benefit plan, superannuation supplies a fixed, predetermined benefit depending on a variety of factors.
  • Certain factors that may be considered while issuing the fund are:
    • The number of years the person was employed with the company.
    • The salary received by the employee.
    • The exact age at which the employee begins to draw the benefit.
  • Superannuation funds have a highly predictable return.
  • Upon qualifying for retirement, the eligible employee receives a fixed amount, usually on a monthly basis. The amount is determined by a preexisting formula that facilitates the employees to receive Social and Security benefits upon reaching the qualifying age or under qualifying circumstances.

Income Tax Treatment

Superannuation is a fund received by an employee from the employer. Hence, superannuation funds become taxable when it exceeds a certain threshold. In the case of the superannuation fund, the following categories decide the types of tax treatments available.

  • Employee’s Contribution
  • Employer’s Contribution
  • Interest on accumulated balance
  • Payment from the fund

Employee’s Contribution

Deduction under Section 80C can be claimed for funds invested in an approved scheme by an employee.

Employer’s Contribution

The Government allows an amount of Rs. 1, 50,000/- per year per employee as an exemption. The Government provides the exemption exclusively if the employer contributes to the fund. In the specified circumstances the contribution may exceed Rs. 1, 50,000/-. In such cases, the balance would be taxable in the hands of the employee.

Interest on Accumulated Balance

The interest on accumulated balance is exempt from tax.

Withdrawal from Superannuation Fund

Tax-exemption will be available for payment from an approved fund in the following circumstances:

  • On the death of the beneficiary.
  • To any employee in lieu of an annuity on his/her retirement at or after the stipulated age.
  • If the employee becomes incapable of working prior to his/her retirement.
  • By refunding the contributions on the death of the beneficiary.
  • By transfer of the account of the employee under a pension scheme referred to, in section 80CCD that in-turn is notified by the Central Government.

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