Many employers extend retirement benefits to long-term employees as a form of loyalty reward, and superannuation is a key component of these benefits. Dedicated employees who remain with a company for extended periods often qualify for such retirement perks. This article explores the definition, types, benefits, and the functioning of superannuation.
Superannuation: Meaning
Superannuation denotes a pension plan provided by a company, or an employer to benefit its employees. Also recognized as a corporate pension scheme, superannuation entails the accumulation of funds in employees’ accounts throughout their working years without incurring taxes. Upon retirement, individuals can access these funds, ensuring a financially secure future. In essence, superannuation is a retirement pension arrangement that facilitates future planning, coupled with tax advantages.
Superannuation in India
In the Indian context, the Employees’ Provident Fund (EPF) stands out as one of the most prevalent superannuation schemes. Mandated for employees in organizations with a workforce exceeding 20, the EPF not only ensures retirement benefits but also extends financial assistance during emergencies, covering aspects like medical expenses and housing loans. Another noteworthy superannuation initiative in India is the National Pension System (NPS). Positioned as a voluntary retirement savings plan, the NPS welcomes all Indian citizens. Offering investment flexibility and tax advantages akin to other superannuation schemes, the NPS empowers individuals with financial planning choices.
Types of Superannuation
Superannuation benefits in India are categorized into the following types based on the investment and benefits they offer:
- Defined benefit plans: In this type of superannuation, the benefit is predetermined, regardless of the contributions made. Factors, such as years of service, salary, and the age at which the employee starts receiving benefits influence the fixed amount. This structure places the complexity and risk of generating benefits on the employer. Eligible employees, upon retirement, receive a predetermined amount at regular intervals.
- Defined contribution plans: In contrast to defined benefit plans, defined contribution plans involve a fixed contribution, and the benefit is directly linked to both the contribution and market forces. This type of superannuation is easier to manage, and the risk is borne by the employees, who remain uncertain about the amount they will receive upon retirement.
How does superannuation work?
Superannuation operates as a compulsory contribution initiated by employers on behalf of their employees. This contribution constitutes a percentage of the employee’s salary and is funneled into a dedicated superannuation fund. Professional fund managers oversee the superannuation fund, strategically investing contributions across various financial instruments, including stocks, bonds, and government securities. The objective is to generate returns and foster growth within the fund over time. Upon reaching retirement, individuals can opt to withdraw the accumulated superannuation fund either as a lump sum or in regular installments. The amount received is contingent on factors, such as the contribution duration, the rate of return, and any additional contributions made by the individual.
Superannuation: Benefits
Some of the major benefits of superannuation include:
Tax benefits
Contributions made towards superannuation qualify for tax deductions under Section-80C of the Income Tax Act. This provision enables individuals to reduce their taxable income, resulting in lower tax liabilities.
Employer contributions
Many Indian employers include superannuation as part of their employee benefits package. Employers contribute a percentage of the employee’s salary to the superannuation fund, facilitating accelerated savings growth.
Long-term savings
Superannuation serves as a catalyst for long-term savings, motivating individuals to build a substantial corpus for retirement. Regular contributions enable the creation of a robust financial cushion, ensuring security during retirement without straining current finances.
Flexibility
Superannuation funds offer flexibility in terms of contribution amount and withdrawal options. Individuals can adjust contributions based on financial circumstances and choose partial or full withdrawal upon retirement.
Compounding returns
Superannuation funds benefit from compounding returns, where interest earned on investments is reinvested, leading to exponential growth. This compounding effect maximizes savings and fosters higher returns over time.
Types of annuities available in India
There are several kinds of annuity options available in India, such as:
- Payable for life: This annuity option provides regular payments for the entire life of the annuitant. It ensures a steady income stream as long as the individual lives.
- Payable for life guaranteed for 5/10/15 years: Annuities under this category guarantee payments for the annuitant’s lifetime. Additionally, if the individual passes away within 5, 10 or 15 years (chosen duration), the nominee continues to receive the annuity for the remaining period.
- Payable for life with a sum return of capital amount: This type of annuity guarantees payments for the annuitant’s lifetime, and upon their demise, a predetermined sum is returned to the nominee as the capital amount.
- Payable jointly on the life of the spouse: Joint life annuities ensure payments as long as either spouse is alive. After the demise of one spouse, the surviving spouse continues to receive the annuity.
FAQs
What is superannuation, and why is it essential for employees?
Superannuation is a retirement benefit provided by employers to long-term employees as a loyalty reward. It involves accumulating funds throughout an employee's career, offering tax advantages and financial security in retirement.
What is the type of superannuation benefits available in India?
In India, superannuation benefits include defined benefit plans, where the benefit is fixed, and defined contribution plans, where the benefit is linked to contributions and market forces.
How does the superannuation process work, and what happens upon retirement?
Superannuation operates as a mandatory contribution by employers, investing a percentage of the employee's salary in a dedicated fund. Upon retirement, individuals can withdraw the accumulated fund as a lump sum or in installments.
What are the major benefits of having a superannuation plan?
Superannuation offers tax benefits, employer contributions, long-term savings, flexibility in contributions and withdrawals, and compounding returns for maximized savings.
What are the different types of annuities available in India for superannuation?
Annuities in India include options like payable for life, payable for life guaranteed for a specified duration, payable for life with a return of capital amount, and payable jointly on the life of the spouse, providing various choices for retirees.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
Dhwani is a content management expert with over five years of professional experience. She has authored articles spanning diverse domains, including real estate, finance, business, health, taxation, education and more. Holding a Bachelor’s degree in Journalism and Mass Communication, Dhwani’s interests encompass reading and travelling. She is dedicated to staying updated on the latest real estate advancements in India.
Email: dhwani.meharchandani@housing.com
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