Approved superannuation fund

An employer that sets up a superannuation scheme wants two things from the taxman: to deduct its contributions as a business expense, and to let the money grow without being taxed along the way.

Neither happens automatically. The fund first has to be approved by the Commissioner of Income Tax. Once approved, the Income Tax Act calls it an approved superannuation fund, and a set of tax benefits switches on — for the employer, the fund itself, and the employee.

Conditions for approval, under Part B of the Fourth Schedule:

• The fund is an irrevocable trust, connected with a trade or undertaking carried on in India, with at least 90% of its employees employed in India.
• Its sole purpose is to provide annuities to employees on retirement, or on incapacity before retirement, or to widows, children or other dependents on the employee's death.
• The employer must be a contributor.
• All annuities, pensions and other benefits are payable only in India.

Tax benefits once approved:

• Section 10(13) — payments from the fund on death, or by way of commutation on retirement, or on incapacity, or as a refund of contributions on death, or by transfer to an NPS account under section 80CCD, are not included in the recipient's total income.
• Section 10(25)(iii) — income earned by the trustees on the fund's behalf is not included in the trust's total income — the fund accumulates tax-free.
• Section 36(iv) — the employer's contributions, within the prescribed limits and CBDT conditions, are allowed as a deduction in computing the employer's business income.
• Section 80C — the employee's own contributions are deductible, subject to the Section 80C ceiling.

Illustrative figures.

Meridian Textiles Ltd sets up a superannuation trust for its senior staff and applies for approval from the Commissioner of Income Tax. The trust is irrevocable, 96% of covered employees work in India, its sole purpose is paying retirement annuities, and Meridian itself contributes to it — so approval is granted.

In one year, Meridian contributes Rs 40,00,000 to the fund for its employees. Under Section 36(iv), this is deductible from Meridian's business income, reducing its tax bill. The fund earns Rs 3,50,000 in interest on its investments that year — under Section 10(25)(iii), this Rs 3,50,000 is not taxed in the trust's hands at all.

When employee Mr Verma retires, he commutes part of his share as a lump sum. That commuted amount is exempt under Section 10(13). Had the fund not been approved, Meridian could not have deducted its Rs 40,00,000 contribution, and the fund's interest income and Mr Verma's payout would both have been taxable in the ordinary way.

Chapter 4 (Retirement Planning Basics), section 4.5.3 — Approved Superannuation Funds — gives the Income Tax Act's definition, the Fourth Schedule approval conditions, and the four tax sections in sequence. Expect a question asking who grants the approval, what the four conditions are, or which of 10(13), 10(25)(iii), 36(iv) and 80C applies to the employer, the fund, or the employee.

• Approval is by the Income Tax Commissioner, under the Fourth Schedule — not by IRDAI or PFRDA, which regulate insurers and NPS respectively.
• The 90% test is about where employees work, not where the employer is incorporated.
• Four sections, four different beneficiaries: 10(13) exempts what the employee or their family receives; 10(25)(iii) exempts the fund's own income; 36(iv) is the employer's deduction; 80C is the employee's deduction on their own contribution.
• The employer must contribute — a fund funded entirely by employees does not qualify as an approved superannuation fund on the workbook's conditions.
• A pay-as-you-go scheme, with no trust and no fund at all, cannot be an approved superannuation fund — approval requires an irrevocable trust to exist in the first place.