Superannuation - What is Superannuation

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Superannuation - What is Superannuation

Financial security is vital to spend your post-retirement life in peace and fully enjoy it. This is where retirement planning comes in. There are many ways to plan for retirement but one popular way to go about it is a superannuation scheme.

Superannuation funds allow you to save effortlessly for retirement during your working years.

However, many remain unaware of whether their employers offer retirement benefits and fail to maximise their scheme’s benefits. This article will delve into superannuation’s meaning, its types and more.

Superannuation Meaning

A superannuation scheme is a pension plan a company or employer offers to its employees. The employer contributes towards a superannuation fund that helps provide steady income to the employee on retirement. Employee contributions are voluntary.

As an employee, you can withdraw your superannuation amount on retirement or under conditions like death, disability or a financial crisis.

Superannuation is also known as a company pension plan. It is an efficient tool through which you can accumulate a significant retirement corpus without tax implications.

How Does Superannuation Scheme Work?

An organisation usually avails a superannuation plan from an insurance provider on behalf of its employees. It may manage a superannuation fund through its trusts. The employer contributes up to 15% of your base salary and dearness allowance to the pension plan.

  • You may also voluntarily contribute to the scheme. If you wish to contribute to the superannuation plan, the amount is deducted from your salary. You must note that superannuation is usually detailed in the employees' Cost to the Company (CTC).

  • You can withdraw up to one-third of the accumulated corpus as a lump sum on reaching the superannuation age. The balance is used to provide annuity returns at regular intervals.

  • You can also transfer the superannuation corpus to your new employer in case of a job switch. The accumulated funds are transferable if the employer offers a superannuation scheme.

  • If there are no superannuation benefits offered by the new employer, you can keep the amount invested until retirement or withdraw it. However, if you wish to withdraw the accumulated money, it won't be eligible for a tax exemption.

Types of Superannuation Benefits

Superannuation retirement plans are classified into defined benefits plans and defined contributions plans. Each plan has its own features and benefits you must consider to make an informed decision. Let's discuss each in brief:

Defined Benefits

A defined benefit plan is a fixed benefits superannuation plan. As the name suggests, the benefits under this plan are already fixed regardless of the contribution amount or the fund’s investment performance.

The calculation of the benefits is done on a predetermined basis. Several factors like your salary, the number of years of employment in the company, age at which you will start receiving the benefits, your position, etc., determine the superannuation benefits.

Since your employer is responsible for the predetermined benefits you will receive under the plan, the terms under which the defined benefits plan operates will be subject to the policy terms and conditions stipulated by your employer and the insurer.

However, it ensures financial certainty as you will receive a predetermined amount at regular intervals. Public sector and government organisations usually provide this type of superannuation benefit.

Defined Contributions

A defined contributions plan on the other hand is the opposite of a defined benefits plan.

While a defined benefits plan has pre-determined and fixed benefits, a defined contributions plan involves fixed contributions. The benefits under this plan are not fixed but rather based on factors like the contributions made, the fund’s investment performance and market fluctuations.

As an employee, you bear the risk of market fluctuations and investment performance. It is a more common superannuation scheme since it is better to manage. However, researching the market dynamics is essential to optimise your returns. A defined contributions plan is usually offered by the private sector and corporate entities.

Types of Superannuation Plans

The two main types of superannuation plans include defined benefits plan and defined contributions plan. However, a few other types of superannuation plans are as follows:

Hybrid Plan

As the name suggests, a hybrid superannuation plan is a mix of a defined benefits plan and a defined contributions plan. In this plan, a part of the superannuation benefits is guaranteed and fixed.

The remaining portion of benefits are determined by the market performance of the investment. A hybrid plan is a suitable option if you want income stability while also benefiting from the potential of higher returns.

Employee Choice Plan

Employee choice plan acknowledges that every employee has unique needs, financial objectives and risk tolerance. This superannuation plan allows you to tailor the most suitable retirement plan that suits your financial goals and risk appetite.

In this plan, you can choose between a defined benefits plan or a defined contributions plan. I

If you are a young employee who wants to make long-term market gains, a defined contributions plan can help you achieve your retirement goals. On the other hand, you can choose a defined benefits plan if your retirement is near and you want to ensure income certainty.

Group Superannuation Cash Accumulation Plan

A group superannuation cash accumulation plan is another type of superannuation that works on collective contributions. This plan involves contributions from both employer and employee towards the superannuation fund.

The accumulated cash is then used for investments in multiple financial tools. The market gains and the compound interest let your retirement funds grow. When you retire, you receive the accumulated funds and also the returns from the investments made.

Types of Annuities Under Superannuation Schemes

Annuity forms a vital part of the superannuation scheme. It refers to the periodic payments you receive after retirement in exchange for regular contributions. The types of annuity available under superannuation plans include:

  • Pension for life

  • Payable for life at fixed intervals of 5, 10 or 15 years

  • Lifetime pension with a Return on Capital (ROC)

  • Payable jointly on an employee’s and spouse's life

Income Tax Benefits of Superannuation

Now that you know the superannuation pension meaning and its types, let’s discover the tax benefits of the scheme.

Like other retirement schemes, a superannuation plan also offers tax benefits to both the employer and the employee. However, the tax benefits are offered on approved superannuation funds.

Let’s discuss the tax benefits of superannuation for the employer and the employee in detail below:

Tax benefits for the Employer

The employer’s contributions towards an approved superannuation fund come under the category of tax-deductible business expenses. Furthermore, the income earned by self-managed trusts of an approved fund is also tax-exempt.

An approved superannuation fund is the one approved by the Income Tax Commissioner. The commissioner approves superannuation funds that meet certain conditions. Since tax benefits are offered to approved funds only, it is crucial to ask your employer if your superannuation fund is approved or not.

Tax benefits for the Employee

  • The voluntary contributions of an employee towards an approved superannuation fund are eligible for a tax deduction of up to ₹1.5 lakh under Section 80C

  • The benefits of a superannuation fund received by an employee due to death or injury are also exempt from tax

  • The superannuation benefits given to the employee after a predefined age including the lump sum withdrawal and the annuity payouts are tax-free

  • Interest on a superannuation plan is tax-free

  • Superannuation benefits are exempt from taxation if the employee is unable to work before retirement due to any reason

  • The amount withdrawn by the employee at the time of a job switch is eligible for taxation under the “Income from other sources” head

Also Read: What are the Heads of Income under Income Tax Act?

Benefits of Superannuation for the Employer

A superannuation scheme is advantageous not only for the employee but also for the employer. Let's understand the scheme’s benefit from the perspective of an employer.

Superannuation forms a critical part of competitive compensation packages. The provision of superannuation benefits by an employer reflects the company’s concern about the long-term financial security of its employees.

Hence, superannuation is a good way of attracting a talented and loyal workforce to an organisation. When employees feel their employer is committed to their long-term financial security, they work more dedicatedly and honestly for the company.

Another advantage of providing superannuation benefits to employees is tax benefits. The contributions made by the employer towards the superannuation fund are eligible for tax deductions.

Benefits of Superannuation for the Employee

Superannuation offers the following benefits to an employee:

Old age Security

One of the prominent benefits of superannuation is old age security. By providing a steady stream of income when you are no longer working, superannuation helps you tackle the uncertainties of old age.

Low Fees

Superannuation plans usually have low fees, which makes them an affordable way of saving for retirement.

Flexible Payouts

Once you retire, you can withdraw a maximum of one-third of the corpus as a lump sum. The remaining portion of the superannuation fund is converted into an annuity.

The lump sum withdrawal can help you tackle emergencies after retirement, while the rest of the annuity can help you manage the day-to-day expenses.

Tax Benefits

Superannuation scheme provides tax benefits too. The contributions towards the superannuation fund are tax deductible. Moreover, the payouts are also tax-free once you reach retirement age.

Employer Contributions

The superannuation scheme involves contributions from the employer who contributes a maximum of 15% of your basic salary to the pension plan. This allows you to save for retirement without actively contributing to the fund.


You can transfer your superannuation benefits to the new employer in case you change your job. This helps you continue your retirement savings no matter where you work.

Early Access

Another benefit of superannuation is that it allows you to make early and penalty-free withdrawals in case of an illness or injury. This helps you tackle a difficult time without financial woes.

Difference Between Superannuation and Retirement

  • The terms superannuation and retirement are often used interchangeably. However, both have different meanings.

  • As discussed above, superannuation is a financial tool set up by an employer of an organisation. It is primarily a fund that receives periodic contributions from the employer or both you and the employer and employee. You can withdraw the accumulated funds on retirement.

  • Retirement, on the other hand, refers to the end of your professional career after reaching a particular age. It involves a shift from your working years to a phase of rest. You may rely on pension, savings or other sources of income to enjoy your post-retirement life.

  • Superannuation schemes are one way to financially secure your post-retirement phase of life while retirement is just an act of leaving your job or ceasing to work.

Wrapping Up

In India, superannuation has become a vital tool for employees to secure their post-retirement life. It provides a steady source of income once you retire. You can also withdraw a lump sum to tackle bigger expenses.

Besides providing financial security in your old age, superannuation also offers tax benefits.

However, many employees are not aware of the superannuation allowance and its benefits. It is, therefore, essential to spread awareness about the scheme so that employees can make informed decisions regarding their retirement planning strategies.

Another crucial tool to lead a stress-free life is a medical insurance policy. It is a robust way of tackling health concerns, especially in your retirement years, as it can help cover medical emergencies.

At Tata AIG, we offer several medical insurance plans at pocket-friendly rates. We also provide insurance for pre-existing medical conditions. So, don't delay! Get a health insurance plan for yourself and your loved ones today.

Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

Related Articles

Can I invest in superannuation and NPS simultaneously?

Can I invest in superannuation and NPS simultaneously?


Yes, you can invest in superannuation and the National Pension Scheme together. Superannuation is offered by your employer while NPS is a scheme offered by the government that allows long-term investment for retirement.

Which is the most common superannuation fund in India?


Defined contributions or accumulation funds are the most common type of superannuation funds in India. In a defined contributions plan, your retirement savings grow according to the contributions and investment returns.

Shall I invest in superannuation?


Yes, if you are looking for long-term financial security, investing in superannuation can be a wise decision. Superannuation is an excellent tool to save for retirement. It is complemented by contributions from your employer. Besides securing your old age, you can also save on taxes by investing in superannuation.

Is it mandatory for the employee to contribute to the superannuation fund?


No, it is not mandatory for an employee to contribute to the superannuation fund. Your employer contributes 15% of your basic salary to the fund. You may or may not choose to make the contributions.

When can an employee withdraw money from a superannuation fund?


As an employee, you can withdraw the accumulated money from superannuation once you reach a pre-defined retirement age, or in case of death, disability or a financial crisis.

Can I withdraw my superannuation amount if I want to change my job and my new employer does not have a superannuation fund?


Yes, you can withdraw your superannuation amount in case of a job switch. However, you will have to pay tax on such an amount. It is wise to leave the accumulated corpus as it is until retirement.