What is Superannuation? Types and Tax Benefits

Written by : Knowledge Center Team

2026-01-07

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Superannuation is a benefit provided by an employer to help their employees build a retirement corpus. It is a type of retirement pension scheme provided by an organisation for the welfare of its employees.

Retirement could have different meanings for different people. For some, it is when you are no longer permitted to work for your employer. For others, it could mean a time when they no longer feel like working for money anymore.

The age for retirement varies across organisation and geographies. In India, most organisation and government departments have fixed either 60 or 65 as the age for retirement. This age was increased from the earlier 58. The increase in retirement age was done keeping in view the increasing average life spans in India. The current average life span is 70 years which means several people live much beyond this age.

With retirement, the greatest change that occurs is that you switch from a dependent income to an independent income stream. Saving during the working years is the best way to accumulate a large corpus that can yield payouts when you retire.

Key Takeaways

Superannuation is a structured retirement savings plan where employers contribute on behalf of employees to build a retirement corpus
There are two main types of superannuation plans - Defined Benefit (fixed pension payout) and Defined Contribution (variable payout based on investment performance)
Superannuation funds provide tax benefits, making them an efficient way to save for retirement
Employees have multiple payout options, including lump sum withdrawal, annuity, or a combination of both
Superannuation is different from other retirement plans like EPF, NPS, and PPF, but can be used alongside them for a secure retirement

What is Superannuation?

Superannuation is a retirement benefit provided by an employer to help their employees build a retirement corpus. Superannuation is an organisational pension program created by a company for the welfare of its employees. It is also called as a company pension plan. In general, funds that are deposited in a superannuation account grow until withdrawal or retirement, without tax implications.

There are several options to invest and each comes with unique benefits. You may invest in PPF to earn a predictable return or look at pension plans if you want a steady flow of money until the end of your life. Needless to say, ULIPs are useful to generate wealth and take advantage of bull runs in the equity market.

Types of Superannuation

Superannuation can be broadly classified into two types:

Defined Benefit: In this type, the benefit is predefined, meaning the amount payable to the employee in retirement can be easily calculated using a prescribed formula. The monthly investment or contribution has no bearing on the output. The amount payable post-retirement depends on the number of years of service and the employee's pay scale. Gratuity is the best example of a defined benefit superannuation scheme.
Defined Contribution: In this case, the contribution is defined and the output is a factor of the input + market forces. The upside is that the employee can decide their contribution amount depending on the retirement corpus they are aiming to build.

How Does a Superannuation Plan Work?

Insurance firms manage superannuation funds and most employers prefer to buy such group superannuation plans. The general thumb rule is to invest about 15% of your base income into the superannuation fund. However, the ultimate decision rests with you.

You may choose not to invest as well. Although the monthly contribution looks minuscule, it is good enough to build a sizeable capital that can help you meet your financial obligations post-retirement. The interest rates offered on superannuation schemes are similar to those applicable on Provident Fund.

Even if you change employment, you can transfer your fund to your new employer or even withdraw. You can choose to leave it as it is, as well, until retirement.

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Who is Eligible for a Superannuation Plan?

Superannuation plans are primarily designed for salaried employees working in organisations that offer retirement benefits. Eligibility criteria generally include:

Full-time employees of a company that provides superannuation as part of their benefits package.
Individuals who have completed a minimum period of service, as specified by the employer.
Employees are covered under an approved superannuation scheme as per company policy.
Some plans may allow voluntary contributions from employees in addition to employer contributions.
Eligibility may also depend on age, with benefits typically available upon reaching the retirement age set by the company.

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Key Features of Superannuation Plans

Superannuation plans come with several important features that make them a structured and beneficial way to save for retirement:

Employer Contribution: Companies contribute a fixed percentage (typically 15% of basic salary) to the fund on behalf of employees.
Tax Benefits: Contributions to an approved superannuation fund are eligible for tax deductions under Section 80C.
Pension Payout Options: Employees can choose between lump sum withdrawals, annuities, or a mix of both upon retirement.
Transferability: Employees can transfer the fund to a new employer or withdraw it in case of job changes.
Compounding Growth: The money invested in a superannuation fund grows over time, benefiting from the power of compounding.

Did You Know?

As per Income Tax rules, up to one-third of the superannuation corpus can be withdrawn tax-free at retirement, while the balance must be used to purchase an annuity.

Source: Mint

Types of Annuity Options Under Superannuation

You have multiple options to access money in the form of a pension from your superannuation fund. A few are listed below:

Deferred Annuity or Pension: Deferred pension schemes are similar to deferred annuities. You may opt to get either a lump sum amount on or after a certain date or avail of regular pay-outs in the form of annuities.
Payable for Life: In this case, you will get a pension from the date of retirement until the end of your life.
Return of Corpus: You will get a pension until the end of your life. The corpus is then returned to your nominee.
Guaranteed for a Term (5/10/15/20 Years): A guaranteed pension amount is paid out for the defined term.
Joint Life Pension (With or Without Return of Corpus): Pension will be paid to you and then to your spouse after your demise. If the return of corpus is opted for, the corpus would go to the nominee.
Joint Life with 50% Pension to Spouse: As the term indicates, the pension amount to the tune of 50% of the amount paid to you, will be paid to your spouse after your demise
Increasing Pension: Your expenses may gradually increase post-retirement. Healthcare costs go up along with age. If you opt for an increased pension, your pension will gradually increase with age.
Commutation: You can opt to take a portion of the fund as a lump sum amount and the rest in the form of a pension.

Income Tax Benefits In Superannuation

Both employers and employees can avail income tax benefits for superannuation schemes under the Income Tax Act, 1961. The income tax benefits are available for the superannuation schemes approved/recognised by the Commissioner of Income Tax.

Contribution to an approved superannuation scheme offers the following tax benefits:

Benefits for Employer :- Employers can claim their part of the contribution to the employees’ superannuation fund as a deductible expense. Other than that for self-managed trusts, the income from an approved superannuation fund is exempt from tax.
Benefits for Employees:- Employees have the following tax benefits available to them while contributing to an approved superannuation fund:
- Contribution of up to Rs 1.5 lakh in one financial year is deductible under section 80C.
- The benefit you receive upon injury or received by the family upon death is not taxable.
- Interest earned on the funds in the superannuation fund is not taxable.
- You can withdraw up to 1/3rd of the fund value tax-free upon retirement. The remaining amount should go to a pension plan.
- Employer’s contribution to your superannuation fund over Rs 1.5 lakh per annum is taxable as a perquisite.
- Any amount you withdraw at the time of switching jobs will be taxable.

Superannuation Vs. Other Retirement Plans

While superannuation is a popular retirement savings option, it differs from other common retirement plans like the Employees' Provident Fund (EPF), National Pension System (NPS), and Public Provident Fund (PPF):

EPF: Mandatory savings scheme for salaried employees with contributions from both employer and employee.
NPS: A government-backed voluntary savings scheme that allows investment in equity and debt funds.
PPF: A long-term investment option with guaranteed returns and tax benefits, ideal for self-employed individuals.
Superannuation: Primarily employer-driven, offering structured retirement benefits with tax advantages.

Each of these plans serves different financial needs, and employees can combine them for a diversified retirement portfolio.

How to Withdraw Money from a Superannuation Fund?

Withdrawal from a superannuation fund depends on specific circumstances such as retirement, resignation, or job change:

Upon retirement, employees can withdraw up to 1/3rd of the corpus as a lump sum (tax-free) and use the rest for an annuity.
If an employee resigns or switches jobs, they can transfer the fund to their new employer’s superannuation scheme or withdraw the amount, which may be taxable.
In case of death or disability, the nominee or family members can claim the corpus as per the plan’s terms.
Some plans allow partial withdrawals under exceptional conditions, such as medical emergencies.

Conclusion

Superannuation funds are a great way to ensure a financially comfortable retirement. With employer contributions based on salary, age, and other factors, employees can build a substantial retirement corpus. By saving and investing early into these schemes, you can secure a huge corpus for your golden years, enjoying the peace and financial stability you have always wished for in retirement.

Glossary

Corpus: A substantial amount of money saved or invested, especially for retirement
PPF (Public Provident Fund): A long-term savings scheme in India offering tax benefits and predictable returns
ULIP (Unit Linked Insurance Plan): A financial product that combines insurance and investment, benefiting from market growth
Annuity: A financial product that provides regular payouts, often used in retirement planning
Gratuity: It is a lump-sum payment from an employer to an employee as a token of appreciation for long service, typically after 5 years

FAQs

Retirement and superannuation refer to financial planning phases for the later years of life but differ in scope and specifics. Retirement generally marks the end of one's career and the beginning of relying on savings or pensions. Superannuation is a specific system where contributions are made into a retirement fund during one's working years, which is then accessed upon retirement. Essentially, retirement is a broad event, while superannuation is a structured saving mechanism to support that event.

No, superannuation and gratuity are not the same. A superannuation scheme is a long-term retirement savings plan where funds are accumulated over a career. At the same time, gratuity is a one-time payment given to employees upon leaving a job based on the duration of their service.

No, employees aren't required to contribute to the superannuation fund. While your employer contributes 15% of your basic salary to the fund, you have the option to make additional contributions if you wish.

Yes, you can withdraw superannuation funds, but typically only upon retirement, resignation, or if you meet specific criteria set by the fund. Early withdrawals may be subject to certain conditions and penalties. It’s generally better to leave the funds intact until retirement.

Superannuation is generally beneficial as it helps build a dedicated retirement fund with tax advantages. However, its effectiveness depends on individual financial goals and investment options.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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