In 2024, Indian youth will account for nearly 29% of its population. As per the current inflation pace, this youth population may be hit hard in retirement. Retirement is when medical expenses increase, there is no regular income source, and ageing hinders an individual’s functionality. Moreover, the current situation of growing nuclear families, high life expectancy, and high inflation pose a threat to material survival.
The only way to combat this is to plan in the early stage of life. Investment for the long term can be facilitated by contributing a part of regular earnings. Such disciplined savings will help one secure the retirement age.
Superannuation is a retirement-oriented scheme, which may help investors discipline their investments. However, very few people know about it in detail. This blog would help you give a perspective of the plan, its rules, types and benefits.
What is superannuation?
It is similar to a pension scheme in which the employer and employee contribute to create a corpus for retirement. These are voluntary benefits which can be availed at the investor’s discretion. The contribution is part of employee cost to the company (CTC).
Superannuation meaning is a constraint to the period when an individual decides to quit the regular income, like salary or attain the retirement age. Moreover, in Australia, it is an account used in the distribution of pensions.
In line with this meaning, in the United States of America, the equivalent instrument is a definite benefit or defined contribution plan.
Superannuation in India
In India, a superannuation plan is a set of different pension options like the National Pension Scheme (NPS), Employee Provident Fund (EPF), gratuity, etc. Apart from this, some organisations provide the facility to maintain separate superannuation funds.
If it is not available, employees may also create such a fund with the help of private organisations that provide superannuation plans.
Also, read this: VPF vs NPS: Which retirement plan should you choose?
How does it work?
An organisation has its established trust or facility to manage the fund. Otherwise, the superannuation fund is managed with the help of any insurance company or other private entity.
In India, this contribution is based on the sum of the base salary and dearness allowance of an employee. It functions in the following manner:
- The fund is invested as per the norms specified by the specific pension plan under superannuation,
- The employer contributes 15%, and the employee contributes 12% to a superannuation scheme provided by the government, in India.
- Moreover, under the Income Tax Act, 1961, an individual can withdraw 25% of the amount after three years of investment from any superannuation fund recognised by the act.
- Moreover, when an employee changes his/her job, this fund can be transferred from one employer to another.
- In India, if any company fulfils the criteria mentioned by the government, it is compulsory to contribute as per the above-mentioned %.
- If an employee changes jobs which do not qualify the criteria, then one can withdraw the accumulated funds if required.
Types of superannuation plans
Generally, the superannuation plans are categorised based on fixed contribution and benefit. These benefits are determined before starting by mainly these two types:
Defined contribution plan
As the name suggests, the contribution is fixed before starting this plan. The final benefit for the employee is not fixed. Due to this feature, there is also a risk of market fluctuations. The fund created out of fixed contributions may not sum up to match the desired returns.
In India, EPF and NPS are defined contribution plans. However, the market risk is less in EPF. NPS may have exposure to the market.
Defined benefit plan
In the exact opposite nature, the benefits are fixed at the end of the service period or the superannuation. It helps provide a shield at the time of retirement. It is calculated based on service period, base salary, dearness allowance, designation at the time of retirement, etc. Employees are attracted to such benefits.
In India, gratuity and leave salary are plans that help employees earn benefits during retirement, per the policies and conditions.
Must read: Importance of Pension Plans
Employer perspective benefits
The contribution by employees to the creation of funds (approved by the Income Tax Act, 1961) for employees can also provide some benefits such as:
- It is a part of the CTC. It increases the total pay structure. Eventually, the potential candidates are attracted to the job.
- The long-term financial assistance provided by this also satisfies employees and helps in their retention.
Employee perspective benefits
Employees usually seek such schemes, which can help them in disciplined investment along with regular earnings. Moreover, they also benefited in some ways:
- The employee is satisfied with his/her old-age security.
- As mentioned above, one can withdraw a certain amount from the fund while the rest enjoys growth.
- One can transfer the funds in case of a change of job.
- The contribution of less than ₹1.5 lakhs is deductible under Section 80CCC of the Income Tax Act, 1961.
Bottomline
We can define superannuation as the age of retirement. Different countries have separate uses of the term. In India, it is the list of pension facilities like EPF, NPS, gratuity, etc. The two main categorisations of such plans are based on their benefits and calculations. It helps an individual start compulsory investment for retirement in the early years.
Check this out: Tax-efficient withdrawal strategies for retirement in India.
FAQs
Q1. Can you explain superannuation in english?
Superannuation refers to retirement due to age or at the discretion of an individual. Superannuation funds or plans are instruments in different countries that provide shields for retirement. Employees and employers contribute to it voluntarily and thus create a corpus for the future. In India, the schemes providing pension benefits are the superannuation plans.
Q2. What is the difference between superannuation and retirement?
Superannuation term is generally used for retirement benefit plans such as PF, gratuity, NPS, etc. Moreover, superannuation can be the period after the completion of a job or at the discretion of an individual. On the other hand, retirement is the completion of service and can be indicated as a shift from working years to resting years of life.
Q3. How does superannuation work in India?
Superannuation is the set of different pension-providing schemes. In India, the superannuation plans are Employee Provident Funds (EPF), National Pension Scheme (NPS), gratuity funds, leave encashments, etc. They help an individual start disciplined investment in the early years of a job along with regular income.
Q4. Is superannuation and gratuity the same?
Gratuity is a fixed benefit plan that can be categorised along with other plans under the superannuation fund. However, superannuation is a broad term. Gratuity is according to the salary, designation, service period, etc. Other plans like NPS and EPF are also part of superannuation.
