Superannuation

Superannuation is a pension plan that a company sets up for its employees. It is also called a company pension plan. Money paid into a superannuation account grows until the employee retires or takes it out. Typically, no tax is charged on it along the way.

Why does it exist? The compulsory retirement benefits are very often not enough. They do not replace enough income once a worker retires. Employers use superannuation plans to top them up.

In India, no law gives employees a superannuation benefit as of right. The one exception is the Employees' Pension Scheme, 1995. Government bodies, nationalised banks and a very few other bodies may pay pensions themselves. All other employers must buy annuities from LIC or another life insurer approved by IRDAI. An annuity is a series of regular pension payments.

How it cannot be done. An employer that runs a scheme without creating a fund, paying pensions out of current revenue, is relying on its own future profits — and pensioners go unpaid if it has a bad year or goes bankrupt. This method is not allowed. Accounting Standard 15 requires retirement benefits to be provided for in the year of accrual, and Section 2(11) of the Insurance Act makes it obligatory to pay superannuation benefits only through an IRDAI-registered life insurer.

How it is done.

• A superannuation trust — irrevocable and distinct from the employer, with trustees appointed; the employer transfers contributions (both shares, if the scheme is contributory). Trustees review performance, collect contributions (actuarially calculated for defined benefit schemes), invest per the prescribed pattern, arrange pensions and deduct tax at source.
• A superannuation scheme from a life insurance company.

Approval. To deduct its contributions as a business expense, the employer must get the fund approved by the Commissioner of Income Tax under Part B of the Fourth Schedule: an irrevocable trust for a business in India with at least 90% of employees employed in India; sole purpose the provision of annuities; employer must contribute; benefits payable only in India.

Tax benefits of an approved fund:

• Section 10(13) — payments on death, commutation on retirement or incapacity, refunds on death, or transfers to NPS are exempt.
• Section 10(25)(iii) — income of the fund is exempt.
• Section 36(iv) — employer contributions are deductible, within prescribed limits.
• Section 80C — employee contributions are deductible, within the ceiling.

On retirement the employee may take one-third of the accumulation as commutation; the balance buys an annuity. Apart from LIC, other life insurers let customers buy the annuity from any provider.

Limits on employer contributions. Income tax rules restrict the employer's contribution to PF and superannuation together to 27% of the employee's earnings. Separately, where the employer's contributions to EPF, NPS and superannuation together exceed Rs 7,50,000 in a year, the excess, and the interest or dividend on it, is a taxable perquisite.

Illustrative figures.

Sunita's basic salary plus DA is Rs 30,00,000 a year. Her employer contributes:

The Rs 7.5 lakh test. Aggregate employer contributions exceed Rs 7,50,000 by Rs 60,000. That Rs 60,000 — plus the interest or dividend on it — is taxed as a perquisite in her hands, and her employer must withhold tax on it.

The 27% test. PF plus superannuation = 3,60,000 + 1,50,000 = Rs 5,10,000, which is 17% of her earnings — inside the 27% restriction.

At retirement. Her superannuation account has grown to Rs 45,00,000. She commutes one-third, Rs 15,00,000, as a lump sum; being a commutation from an approved fund on retirement at the specified age, it is exempt under Section 10(13). The remaining Rs 30,00,000 buys an annuity, and those annuity payments are taxable income as she receives them.

Had she died before retiring, the payment from the approved fund to her family would have been exempt as well — the workbook singles out that payments on death from an approved superannuation fund remain exempt.

Chapter 4 (Retirement Planning Basics), section 4.5 — Superannuation Benefits to Employees — covering payment by the employer, superannuation trusts, approved funds and trustees' responsibilities; Chapter 5, section 5.1.5, on commutation and contribution limits; Chapter 7 on the Rs 7.5 lakh aggregate limit. Expect questions on why pay-as-you-go by the employer is not allowed, the approval conditions, the tax sections, and the one-third commutation.

• There is no statutory superannuation in India except the Employees' Pension Scheme, 1995.
• Paying pensions out of current revenue is not allowed; benefits must go through a life insurer or an irrevocable trust.
• Approval comes from the Commissioner of Income Tax, and needs at least 90% of employees employed in India.
• One-third commutation on retirement; the rest buys an annuity.
• Two different limits. 27% of earnings caps the employer's PF plus superannuation contribution; Rs 7,50,000 is the aggregate EPF + NPS + superannuation threshold above which the excess is a perquisite.
• Employee contributions qualify under 80C per the workbook — but Table 7.5 shows 80C is not available under the new tax regime.