Superannuation fund taxation: The ultimate guide to saving big
What's the story
Superannuation benefits play a key role in retirement benefits in India, provided by employers to ensure financial stability for employees after retirement. It's essential for both employers and employees to comprehend the tax implications associated with these benefits. This article delves into the important sections of the Income Tax Act pertaining to superannuation benefits in India, assisting in efficient financial planning.
Fund basics
Superannuation fund: A tax-saving tool
A superannuation fund is a pension scheme established by an employer for the benefit of its employees, and is regulated under Section 2(25) of the Income Tax Act, 1961. While an employer's contributions up to ₹150,000 p.a. are exempt from tax, anything exceeding this threshold is taxable in the employee's hands as a perquisite. This means both employees and employers need to keep a close eye on contributions.
Withdrawal norms
Withdrawal rules and their tax implications
The tax implications of superannuation withdrawals hinge on the manner and timing of withdrawal. If an employee gets a superannuation benefit at the time of retirement or termination after serving for five years or more, it is fully exempted from tax under Section 10(13). Conversely, if you withdraw before five years of service (except in specific situations like a medical emergency or death), it is taxable.
Annuity plans
Annuity purchase post retirement
At the time of retirement, a salaried individual has the option to buy an annuity from a recognized insurance company using the accumulated superannuation fund balance. While the amount utilized to buy the annuity is not taxed at that point, any annuity income subsequently received is taxable as 'Income from Other Sources' as per the prevailing slab rates.
Contribution cap
Employer's contribution: Exemption limits and taxability
Employer contributions to an approved superannuation fund are tax-exempt up to ₹150,000 per annum for each employee, under Section 36(1)(iv) of the Income Tax Act. Any contributions exceeding this limit are taxable as part of the employee's salary. This tax is levied at the individual's applicable income slab rates, so it's important for employees to keep a close eye on their superannuation contributions.
Strategic planning
Planning contributions and withdrawals wisely
To make the most of the tax benefits and avoid unnecessary liabilities associated with superannuation funds, both employers and employees need to plan their contributions and withdrawals strategically. By keeping contributions within the exempted limits and timing withdrawals for after retirement or upon completing five years, you can significantly minimize tax obligations. This way, you ensure a financially secure retirement.