Superannuation Meaning

Superannuation fund or superannuation for short is an investment plan for retirement that is typically offered by employers to salaried employees. Employers contribute a defined portion, usually up to 15% of their basic pay and dearness allowance (DA), if applicable, into a superannuation fund on a monthly basis. In the case of some plans, employees may also be allowed to voluntary contributions into the scheme.

The primary purpose of a superannuation plan is to create a corpus that can provide regular income during an individual’s post-retirement life. The funds collected by a superannuation plan are managed by life insurance companies or trusts and typically invested in potentially low-risk, low volatility investment options such as government bonds, debt funds, and other fixed-income instruments.

For example, if your employer contributes ₹1.2 lakh yearly to a superannuation fund, and if the fund grows 6-8% annually, then at the end of a 30-year career, you would have over ₹1 crore for retirement.

One of the biggest reasons to opt for a superannuation plan are the tax benefits that one can avail. Here’s how each component is treated for taxation purposes:

• Employer Contributions: These are considered tax-free up to ₹1.5 lakh per annum under Section 17(2)(vii). Contributions made beyond this limit are treated as taxable perquisite in the hands of the employer.
• Employee Contributions: Voluntary contributions made by the employee in these funds qualify for tax deductions under Section 80C up to the combined ₹1.5 lakh limit. However, as per current rules, this benefit can be availed only provided one has opted for the old tax regime.
• Interest Earned: The returns obtained from an approved superannuation fund are not subject to tax while one stays invested in the fund. This ensures that your investments are able to grow tax-free and the benefit of compounding is maximised.
• Maturity Amounts: At the time of retirement, a portion of the accumulated corpus typically 1/3 of the balance can be withdrawn tax-free. The remaining superannuation fund corpus must be mandatorily used to purchase an annuity plan.
• Pension Income: The annuity payouts that provides monthly pension are taxed as income based on your income tax slab rate.

These tax benefits make it a highly efficient retirement planning tool, especially for salaried individuals in higher tax brackets.

The 5 key benefits of opting for a superannuation plan include the following:

• Locked-In Income Source for Retirement: Getting an income stream in retirement means your lifestyle can be supported. Since the amount gets locked-in and cannot be withdrawn till retirement, so the benefit of compounding can be maximized.
• Tax Incentives: Tax deduction benefits can help you save more on your contributions, earnings and also withdrawals.
• Employer Contributions: Employer contributions that are made into the superannuation fund over and above the employee contribution. This means a higher amount gets deposited in your retirement account regularly that has to potential to substantially grow your retirement corpus over time.
• Lower Cost: In most cases superannuation funds tends to charge lower management fees as compared to other types of pension plans. This can positively impact the size of the final corpus that you can create using this fund.
• Peace of Mind: Superannuation funds invest in potentially low risk and low volatility instruments such as government securities, corporate bonds, etc. As a result, you have the peace of mind that your retirement corpus is at minimal risk from market volatility.

When it comes to superannuation funds, the earlier you start your investment, the more time your funds will have to grow. This is because, by staying invested for longer, you can maximise the benefit from compounding leading to substantial growth of your retirement corpus.

Understanding these 2 different types of superannuation fund options can help make it simpler to choose an appropriate plan that aligns with your retirement goals.

Let us look at how the concept of a superannuation system operates:

• 1. Contributions: Maximum employer contribution allowed in a superannuation fund is up to 15% of the basic pay + DA of the employee. The employee may make additional voluntary contributions but the employer is not required to match such contributions.
• 2. Investment: Superannuation funds typically invest in low-risk instruments like bonds, debt mutual funds, and government securities.
• 3. Growth: The benefit of compounding and periodic investment can help the fund grow into a considerable corpus over time till it is ready to be withdrawn at retirement.
• 4. Withdrawal: At retirement, one-third of the corpus can be withdrawn tax-free. The remaining two-thirds must be used to purchase annuities that can provide monthly pension payments.
• 5. Premature Withdrawals: This is permitted in the case of specific events such as permanent disability, severe illness, or death. In the case of some plans, partial withdrawals are also permitted at the time of changing jobs.

Annuities determine how your post-retirement income is structured. Popular annuity options available in the case of superannuation plans include:

• Life Annuity – Pension payouts occur only as long as you live.
• Joint Life Annuity – Pension payouts continue for your spouse even after your death.
• Annuity with Return of Purchase Price – Pension payouts occur during your lifetime. Remainder of the fund corpus is returned to the nominee after your death.
• Guaranteed Period Annuity – Payout of pension occurs only for a fixed term, e.g. 5 years, 10 years, 15 years, etc.
• Increasing Annuity – Pension payouts increase by a pre-determined percentage with time to help offset the impact of inflation.
• Commutation + Annuity – Allows withdrawal of a portion of the retirement corpus tax-free, while the rest is converted into a monthly pension.

Choose an annuity based on your family needs, risk appetite, and inflation expectations.

Superannuation should be a cornerstone of your retirement plan, but not the only component. One should consider including other long-term options into the overall plan to secure your retirement financially. Popular options include:

• National Pension System (NPS)
• Retirement and Pension Plans offered by life insurance companies
• Public Provident Fund (PPF)
• Unit Linked Insurance Plans (ULIPs)
• Senior Citizen Savings Scheme (SCSS)

The above list is not exhaustive and one can include other options such as fixed deposits, recurring deposits, mutual funds, etc. to secure retirement finance. It is a good idea to use a retirement calculator to determine how much you need and adjust your savings as well as investments accordingly.

India’s superannuation landscape is still in a nascent stage and emerging trends with respect to these retirement schemes include:

• Greater voluntary adoption
• Digital platforms for fund tracking and management
• Portability across employers
• Lower costs and better transparency

As financial literacy improves, superannuation is expected to become a cornerstone of retirement planning for many individuals in India.