Superannuation benefit

A provident fund alone often is not enough to replace a working salary. Some employers add another layer on top of it: a superannuation fund.

The employer sets it up, appoints trustees to run it, and gets it approved by the Commissioner of Income Tax. On retirement, the employee does not get the whole balance as cash. Instead, up to one-third of it can be taken as a lump sum, called commutation, and the rest must go towards buying an annuity.

A company can run a group superannuation scheme in 2 ways: through its own trust fund, with fund managers appointed by the trustees, or by investing in a superannuation scheme from a life insurance company.

Apart from LIC, insurers running these schemes let a member buy the annuity from any annuity provider, not just the fund manager itself.

The tax rules have changed over time, and both figures matter. Historically, the employer's tax-exempt contribution to PF and superannuation combined was capped at 27% of salary — 12% to a recognised PF and up to 15%, subject to Rs 1,50,000 a year, to an approved superannuation fund — with no absolute rupee ceiling. From FY 2020-21, this was superseded: the employer's contribution to a recognised PF, an approved superannuation fund and the NPS, taken together, is capped at an absolute Rs 7,50,000 a year, with any excess, plus the annual growth on that excess from FY 2021-22, taxed as a perquisite in the employee's hands. Payments actually received at retirement or death from an approved superannuation fund remain exempt from tax.

Mr Rao's employer contributes to an approved superannuation fund set up as a trust, alongside his regular PF. Over his career, this superannuation account accumulates to Rs 30,00,000.

On retirement, he takes one-third of it, Rs 10,00,000, as a lump sum through commutation — received tax-free. The remaining Rs 20,00,000 goes towards buying an annuity from an insurer of his choice, since his fund is not run by LIC and does not restrict him to one provider.

In the same year, his employer's combined contributions to his PF, superannuation fund and NPS together total Rs 8,20,000 — Rs 70,000 over the Rs 7,50,000 aggregate cap that applies from FY 2020-21. That excess Rs 70,000, along with any growth it earns from FY 2021-22 onward, is taxed as a perquisite in Mr Rao's hands, even though the superannuation payout itself at retirement remains tax-exempt.

Chapter 6 (Retirement Planning Products: Other Investment Products), in the section on mandatory and employer retirement benefits, introduces the superannuation benefit right after gratuity, gives the one-third commutation rule and both the 27% historical cap and the Rs 7,50,000 combined cap from FY 2020-21. Expect the one-third commutation figure and the Rs 7,50,000 aggregate cap as direct recall points.

• One-third can be commuted; the rest must buy an annuity — this ratio is a common recall point.
• The Rs 7,50,000 cap is combined across PF, superannuation and NPS employer contributions together, not a separate Rs 7,50,000 for each.
• The 27% figure (12% PF + up to 15% superannuation, capped at Rs 1,50,000) is the historical rule; the Rs 7,50,000 absolute cap from FY 2020-21 is what actually governs taxability of excess contributions today. The workbook gives both — do not silently pick one.
• The maturity payout itself remains tax-exempt; it is only the excess employer contribution above the cap, and its subsequent growth, that becomes taxable as a perquisite.
• Apart from LIC-run schemes, the annuity provider need not be the same insurer that ran the superannuation fund.