Superannuation refer to a pension granted upon retirement In general, a pension is an
arrangement to provide people with an income when they are no longer earning a regular
income from employment Retirement plans may be set up by employers, insurance
companies, the government or other institutions such as employer associations or trade
Superannuation is a retirement Benefit by employer. It is a contribution made by
employer each year on your behalf towards the group superannuation policy held by the
employer. This is an important part of creating wealth for your retirement.
Superannuation Fund is a retirement benefit given to employees by the Company.
Normally the Company has a link with agencies like LIC Superannuation Fund, where
their contributions are paid. The Company pays 15% of basic wages as superannuation
contribution. There is no contribution from the employee. This contribution is invested by
the Fund in various securities as per investment pattern prescribed. Interest on
contributions is credited to the members account. Normally the rate of interest is
equivalent to the PF interest rate.
On attaining the retirement age, the member is eligible to take 25% of the balance
available in his/her account as a tax free benefit. The balance 75% is put in a annuity
fund, and the agency (LIC) will pay the member a monthly/quarterly/periodic annuity
returns depending on the option exercised by the member.
LIC superannuation scheme -- Retirement benefits for corporate employees
The term `superannuation' refers to a person reaching the age of retirement. While the retirement
age is fixed at 55 in certain private companies, 58 is more common. A few years ago, the Centre
raised the retirement age of its employees from 58 to 60. A number of State governments too
followed suit, though some retained it at 58.
This article considers the superannuation scheme introduced by the Life Insurance Corporation.
It is a non-contributory scheme for the employees which mean only the employers contribute.
The scheme operates under a master policy issued by the LIC, and t he employer is liable to pay
a certain percentage of the salary as premium every year. The premium may range from 5 per
cent to 15 per cent and the employer may opt to pay the same percentage for all its employees or
pay different percentages for different nt categories of employees.
For instance, a company may decide to pay the same percentage, say, 15 per cent, for all its
employees. Or, it may pay 6 per cent premium for its supervisory staff and 15 per cent for its
Two `Master Policies' have been introduced by the LIC: The Deferred Annuity Scheme and the
Cash Accumulation Scheme. The former is less beneficial than the latter, under which, the
contribution by the company on each renewal date would be accumulated at the rates of interest
declared by the LIC from time to time.
Such interest rates would be higher than those under the deferred annuity scheme. Moreover, the
benefits would be passed on to the members of the scheme without any administrative charge
Further, on leaving the services of the company, whether by resignation or retirement, various
options are available to the annuitants. In the event of the death of a member while in service, the
nominee would become eligible for the pension benefits.
The various options available are
A Getting the full corpus amount in a lump-sum subject to deduction of income-tax, if
applicable. However, certain companies would incorporate certain restrictions in their
superannuation scheme rules.
For instance, a member may be eligible to draw pension only on completing a specified period of
service, say, 5 years. Alternatively, the members may be allowed to avail pension benefits
irrespective of their service as given below:
Less than 3 years: 25 per cent of corpus fund;
3-5 years: 50 per cent;
5-10 years: 75 per cent; and
Above 10 years: 100 per cent.
The unsettled amount shall be returned to the trust by the LIC and the amount may be used by
the trustees for for future premium payments.
Retaining the entire corpus amount till normal retirement date (that is, up to 55 or 58 years as the
case may be) and start getting pension benefits thereafter;
Getting pension on the total corpus (without getting any commutation) on a monthly/quarterly
Getting one-third commutation value of pension corpus amount (maximum limit allowed under
the I-T Act in normal circumstances) immediately and get the pension out of the balance corpus
In the latter two cases, members may opt for the return-of-the-capital scheme, under which the
annuitant will start receiving the monthly or quarterly pension subject to the assurance that in the
event of the death of the annuitant, the corpus amount at the time of getting the first installment
of the pension would be returned to the annuitant's nominee.
Here, again, the original pension corpus amount would be treated as an ordinary endowment
policy and bonus declared by the LIC for those years (intervening period) would be added and
returned along with the corpus amount. This can be explained as in the t able.
Any amount received as pension before the normal retirement date would be taxable as salary
income under Section 17(1)(ii) of the I-T Act, 1961.
However, under Section 1O(10A)(ii) of the Act, any payment of commutation of pension
received under any scheme of any other employer, to the extent it does not exceed in a case
where the employee receives any gratuity, the commuted value of the one-third pension he is
entitled to and, in any other case, the commuted value of one-half of such pension.
Therefore, it is suggested that pension benefits be availed after the retirement date in the normal
circumstances. However, it varies on a case-to-case basis as, in the case of death, the nominee of
the deceased member can opt only for pension for life a nnuity with the return of capital on
death. Here, again, the pension value depends on the corpus amount and the age of the
beneficiary, and so on, at the time the beneficiary starts to receive the pension.
Further, wherever the scheme permits a certain percentage of withdrawal in lumpsum (say, 25
per cent, 50 per cent, 75 per cent and 100 per cent, as the case may be) which may depend on the
length of service, it is advisable to take the full amount of pen sion after considering the tax
Superannuation Scheme Provided by LIC:
The employer contributes a certain fixed percentage of salary of each member. Such
Contributions are accumulated by LIC and the accumulated amount is utilized to provide various
benefits as mentioned below.
1) ON RETIREMENT:
On Retirement of a member, the corpus (contributions plus interest) is utilized to provide the
pension as per his choice.
2) ON DEATH:
The Pension is payable on the life of the beneficiary. Corpus is utilized towards the payment of
pension of the type the beneficiary may opt and the benefit so received is tax free. A lump sum
payable by way of death besides the pension, if the employer has taken Group Insurance Scheme
in conjunction with the Group Superannuation Scheme.
3) ON WITHDRAWAL:
He can get the equitable interest transferred to the Superannuation Scheme of the new
employer or opt for immediate or deferred pension.
PENSION OPTIONS PROVIDED BY LIC:
1. Life Pension ceasing at death.
2. Life Pension with Return of Capital and Group Pension Terminal Bonus on death.
3. Life Pension guaranteed for 5,10,15 or 20 years and life thereafter.
4. Joint Life Pension payable on the last survivor of the employee and spouse.
5. Joint Life Pension payable to the last survivor of the employee and spouse with return of
capital on the death of the last survivor. If desired , 1/3rd of the pension can be commuted
ELIGIBILITY CONDITION :
It is not obligatory or statutory on the part of the employer to provide for pension to all
employees. It is entirely upto him to decide to which class/ classes of employees he desires to
extends the scheme. The eligibility conditions may be defined on the basis of designation or
salary. (However, after the categories are specified, employer cannot discriminate between the
employees and thus extends the scheme uniformly).
The maximum annual contribution that an employer can make to the Pension Fund and Provident
Fund is restricted by the Income Tax Provisions to 27% of the annual salary (basic plus D.A.)
The annual contributions are treated as deductible business expenses.
WHO PAYS CONTRIBUTION?
Mostly the employer contributes, but is so desired, both the employer and the employees may
contribute, in which case the scheme is called a Contributory Pension Fund Scheme.
The provisions relating to the approved Superannuation Scheme are set out in Part 'B' of the
Fourth Scheme of the Income-Tax Act, 1961 and Part XIII of the Income Tax Rules , 1962. The
income tax concession will be available only if the scheme is approved by the CIT.
1. The annual contribution is treated as a deductible business expense in term of Section
36(1) (iv) of the I.T. Act.
2. In terms of a Notification issued by the Central Board of Direct Taxes .80% of the
contribution (s) towards the past service liability are treated as deductible business
expenses spread over in the subsequent years of payment.
3. The employee's contribution , in the case of the Contributions scheme qualifies for
exemption under Section 80C of the Income-Tax Act.
GROUP INSURANCE SCHEME IN CONJUNCTION WITH SUPERANNUATION
The members of the Group Superannuation scheme can be covered under Group Insurance in
conjunction with superannuation scheme so as to provide death risk cover while in service
subject to certain conditions.
TWO TYPES OF BENEFITS
ADVANCE FIXATION OF BENEFITS AND MONEY PURCHASE SCHEME.
EVERY COMPANY IS SUBSCRIBING TO MONEY PURCHASE SCHEME (WITH
THE FIXED PERCENTAGE OF CONTRIBUTIONS PER MONTH TRANSFER
FROM PREVIOUS EMPLOYER CAN ALSO BE RECEIVED (TAX FREE).
TRANSFER TO OTHER'S TRUST CAN ALSO BE PAID (TAX FREE).
NEW EMPLOYER CAN HAVE MINIMUM MANDATORY SERVICE CLAUSES
FOR THEIR OWN CONTRIBUTION BUT THEY CANNOT TOUCH PREVIOUS
15% CONTRIBUTION TAX FREE IS THE BIGGEST TOOL OF TAX PLANNING.
EMPLOYEES IN THE HIGHEST BRACKETS ARE MOST BENEFITED. NOT ONLY
CONTRIBUTION IS TAX FREE BUT THE INTEREST @ 12% IS TAX FREE. 12%
TAX FREE INTEREST IS EQUAL TO 18% TAXABLE INTEREST.
Rules of Superannuation on Maturity
Once the employee completes 3 years of service and works till his/her retirement, he/she
can make use of superannuation balance as a form of pension.
He/She can withdraw 1/3rd of the accumulated balance after retirement and the rest can
be availed as monthly pension till end of life.
Accounts with Small Sums of Money Some special accounts can hold superannuation
money but are not really Superannuation funds, these include: Retirement Savings
Account (RSA) and the Superannuation Holding Account Reserve (SHAR). These are
used when an employer cannot find a superannuation fund that will accept small sums of
Access to superannuation Strict government rules prevent early access to preserved
benefits except in very limited and restricted circumstances, including severe financial
hardship or on compassionate grounds, such as for medical treatment.
Preservation Age Preservation age is the age at which a person may access their
superannuation balance. Your preservation age depends on your date of birth. Born
Between Preservation Age Before 1 July 1960 55 1 July 1960 – 30 June 1961 56 1 July
1962 – 30 June 1963 58 1 July 1963 – 30 June 1964 59 After 30 June 1964 60
Its provides an opportunity to examine the retirement accumulations of those who report
having superannuation schemes, either workplace or personal schemes. Workplace
schemes are defined in the HSS as those involving an employer contribution. For those
who had joined a workplace some time ago, it is possible that membership was
compulsory. However that is no longer typically the case.
For both individuals and couples, it appears that those who belong to a workplace
superannuation scheme have a considerably higher level of net worth. However, for
personal schemes, the difference in net worth between holders and non-holders
becomes statistically insignificant once such socio-economic variables as age, gender,
education, region of residence, income, main source of income, and so on have been
A formal was made of the relationship between the value of holdings in a
superannuation scheme and the value of net worth in other forms of saving. It is
possible that where a person has chosen to participate in a workplace scheme, they
would regard their saving in this scheme as a substitute for other forms of saving. In
fact, in the limit, there could be perfect substitution, whereby for every additional rupees
held in the workplace scheme, one less rupees would be held in other vehicles. A less
extreme case could involve partial substitution, and finally there might be
complementarities. In this latter case, the individual would hold more in other vehicles
as well as increased holdings in a workplace scheme.
10 | P a g e
11 | P a g e