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Superannuation by HA TAX

Superannuation

Jun 10, 2022

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Introduction to Superannuation

Employers generally provide various retirement benefits voluntarily or as per statutory norms to provide a healthy working environment to employees. Retirement benefits mean Provident Fund, National Pension System, Gratuity, and many more. Superannuation is one such retirement benefit offered by employers to their employees. 

Most of the time employees doesn’t pay attention to retirement benefits even though most of them are not aware of superannuation benefit. The amount entitled for the superannuation is even unknown to many individuals. Observing the situation it becomes mandatory to spread awareness about the benefits.

The dictionary meaning of Superannuation is to retire because of age or disability.  It’s a pension program which is formed by the employer to provide benefits to its employees. This retirement benefit is also called Company Pension Plan. 

Superannuation Benefit

The various benefits associated with it are-

  1. Defined Benefit Plans

The benefits which are associated are already fixed in this plan. The pre-determined benefits are decided on factors such as the number of the service years, age, salary etc. The benefit which has to be availed by an employee is complex to calculate and predict. When one retires a fixed amount at a regular interval of time is received by an employee as per the calculation

  1. Defined Contribution Plans

This plan is different from the Defined Benefit Plan. In this contribution has a fixed contribution and the benefit associated with it is directly associated with the market forces. 

The benefits from this plan are easy to manage but the risk lies in the fact that the individual doesn’t know how much is required at the time of retirement. 

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Working of Superannuation

The benefit which has to be received by the employer for his/her contribution for the benefit or on behalf of employees is his bucket of benefits only.

There are many options for organisations with respect to managing superannuation funds. An organisation can open their own trusts, open a superannuation benefit fund which is approved by any insurance company or buy various products from any insurance.

Insurance companies like LIC’s New Group Superannuation Cash Accumulation Plan or ICICI’s Endowment superannuation plans etc.

The employer also contributes a maximum of 15% of employees of their basic pay and dearness allowance. Though the contribution is made by the employee it is ideally superannuation part of Cost To Company (CTC).

But in the case of a contribution plan, employees can also voluntarily contribute an additional amount to the fund. At the time of retirement, the employee can withdraw up to 1/3rd of the benefits and treat it as a regular pension (which is in turn kept in the annuity fund for receiving annuity returns at chosen intervals).

When an employee plans to change his job, one also gets an option to transfer the superannuation amount to a new employer. But in case the new employer does not have any superannuation scheme then the employee may plan to withdraw the amount or retain the amount till the retirement and withdraw.

Types of annuity options available

Common annuity options available are-

  • Payable for life
  • Payable for life guaranteed for 5 yrs/10 years/15 years
  • Payable for life with a return of capital
  • Payable jointly on the life of husband and wife

 

Income tax benefits

It is the scheme which provides income tax benefits to both employees and employers. But benefits are restricted to an approved superannuation fund (the approval should be obtained from the Commissioner of Income Tax rules set out in Part B of the Fourth Schedule of the IT Act)

            I)For the Employer

  • Under Section 80C of Income Tax return, an employee’s contribution is deductible over a limit of Rs 150,000
  • Under the head “Income from another source” the amount withdrawn by the employee at the job change is taxable.
  • Benefits received on injury or death are tax-free
  • The interest earnings are tax-free
  • At the time of retirement 1/3rd of the fund is fully tax-free and also the remaining amount (Note: If the amount is withdrawn, it is taxable in the hands of the employee)
  • Contribution up to Rs. 1.5 Lakh is tax-free whereas an amount more than that is taxable.

 The latest update announced in Budget 2020

The contribution which is made for or on behalf of the employee to the provident fund which exceeds 12% of the employee’s salary is taxable in nature. And the contribution to the superannuation fund by the employer exceeds Rs. 1.5 Lakhs is treated as a prerequisite in the hands of the employee.

Like the same, employees are allowed to claim deduction under National Pension Scheme for 14 % (which is contributed by the Central Government) and 10% (which is contributed by another employer).

Note: There is no maximum limit which is specified for the contribution which is made to the employee by his employer.

The budget 2020 has set the upper limit of Rs. 7.5 Lakhs (with respect to employer’s contribution to NPS, RPF, and Superannuation fund in a year). The amount which is more than Rs. 7.5 Lakh is taxable. Whereas the dividend, interest or similar income received on such funds shall be a prerequisite as it relates to the employer’s contribution (which sums up in his/her total income)

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Life Insurance Policy

Life Insurance Policy is a saviour for individuals who have spouses, children or dependable family members. Even if one has earning spouse, securing one’s life under this scheme is mental relaxation.

Seeing the benefit of such an incredible plan, there are many life insurance companies in India offering similar schemes as per the needs of different individuals and age groups (However, tax structure and implementation must be taken into consideration too at the time of planning)

  1. Deduction under Section 80C

Individuals who have taken insurance and paid the premium can take deductions under Income Tax Act (Section 80C). The deduction is allowed in any state.

Section 80C allows a deduction to an individual as well as Hindu Undivided Family (HUF). With time, it seems that many individuals carry doubt with respect to a deduction but in that situation, one has to refer to regulations and norms put up by the Insurance Regulatory and Development Authority of India (IRDAI), or discuss them with the experts.

The deduction is also allowed over the premium, given the aspect that the premium should not exceed 10% of the sum assured.

Note: 1. For policies which are issued prior to 1st April 201, the premium which is paid should not be more than 20%

  1. Policy which is issued after 1st April 2013 for disabled individuals is required to claim deduction under Section 80C (the premium should not exceed 15% sum assured).

“Sum assured” simply means the minimum amount assured under the policy to the survivor. This amount does not include the premium which has been agreed to be returned or any payment of bonus on the policy.

 

  1. Exemption under section 10(10D) on Maturity amount received

Under the Income Tax Section 10(10D) premium paid which does not exceed 10% (sum assured issued after 1st April 2012) and 20% (sum assured before 1st April 2012) on any amount is exempt from taxation.

Whereas policies taken after 1st April 2013 for individuals with disability or disease under Section 80U and 80DDB are tax-free when the premium is not more than 15% of the sum assured.

 

  1. No exemption from income tax on the maturity of policies

Any premium amount which is more than 10% or 20% (of the sum assured) is fully taxable.

 

  1. TDS on life insurance policy

Under Section 10(10D), an amount which one gets >Rs100000 is not considered to be tax exempted. A TDS of rate 1% is deducted from the insurer’s side before making payment. This is implemented in October 2014.

On the bonus payment TDS will be deducted but if the amount is received is less than Rs. 100,000, the amount will be fully taxable. Where one can claim credit for the TDS deduction in one’s Income Tax Return.

The union budget 2019 has proposed to amend the TDS on insurance policy proceeds to 5% on the amount of income comprised in the proceeds paid or payable upon maturity on or after 1st September 2019.

 

  1. Tax liability of single premium insurance policies

Individual taxpayer most of the time is not sure how to manage insurance premium policy. Let us understand the taxability with an example. Consider that Vishal had taken a policy from an insurance company with a maturity value of Rs 1,10,000. He paid a single premium of Rs 45,000 on 16 September 2013. 10% of the premium works out to be Rs 11,000. The premium of Rs 45,000 exceeds 10% of the sum assured. Therefore, the insurance maturity proceeds are taxable, and not entitled to exemption under section 10(10D) of the Income Tax Act. Vishal surrendered the policy on maturity on 16 September 2019. Since the maturity payment is above Rs 1 lakh, the insurance company is liable to deduct tax on the maturity proceeds. The insurance company is liable to deduct tax at 5% of the income component of the payment, before releasing the payment to the taxpayer. Here, the TDS would be on the net maturity proceeds i.e., on Rs 65,000 (1,10,000-45,000). The TDS would be 5% on Rs 65,000 amounting to Rs 3,250. The net proceeds receivable by Vishal would be Rs 61,750 (65,000-3,250). While filing his income tax return, Vishal should report the net maturity proceeds under ‘income’ from other sources. Also, Vishal can claim the credit for TDS of Rs 3,250 against his tax liability determined while filing his return of income.

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