there are two types of Superannuation schemes:
a. Defined Benefit Scheme: It defines the amount of benefit that an employee receives at retirement.
b. Defined Contribution Scheme: It defines the annual contribution that the employer will deposit into the scheme for each employee.
Superannuation benefits are an acknowledgement by the employer towards loyalty of employees, giving them an extended support in their golden years (retirement).
To activate the plan, an Income tax empted irrevocable trust is formed on approval of the board of directors of the company to build the necessary corpus. Employer has two alternatives under provisions of Rule 89 of Income Tax Rules 1962:
- Create a privately managed trust fund and as and when a member retires, purchase annuity form a Life Insurer to provide pension for such retiring employees.
- Outsource the management of Superannuation Fund to a Life Insurer by subscribing to a Superannuation Scheme.
Defined Benefit (DB) and
Defined Contribution (DC)
- Depending upon the Rules of the Scheme, the retirees may chose to commute part of the pension (maximum 1/3 of pension if Gratuity is payable, otherwise up to ½ as per Rule 90 of the Income Tax) and the balance reduced pension becomes payable. This commuted value on retirement is exempt from tax under section 10(13) of the Income Tax Act 1961.
Tax Implications*
Employers:
- Annual Contribution by the employer to an approved superannuation fund in respect of any particular employee will be treated as expenditure to the company, subject to maximum of Rs. 1,00,000/- per employee.
- Any income received by the trustees on behalf of an approved superannuation fund is exempted (Section 10 (25) (iii) of the Income Tax Act, 1961).
Employees:
- Payment of contribution towards an approved superannuation fund is eligible for deduction, subject to a maximum of Rs. 1,00,000/- (Section 80 C of the Income Tax Act, 1961).
- Commuted amount i.e. commuted part of the pension (maximum up to 1/3 of the pension), is tax free on death or retirement or attainment of certain age (say 50 years).
- Employer’s contribution will not be treated as perks in the hands of the employee.
Pension will be treated as salaried income and taxed accordingly.
sabyasachi.hazra @ sbi-life.com
CAclubindia
