www.bpopioneers.com > INFO CENTRE > Frequently Asked Questions > Superannuation/Pension

1. What is Superannuation Benefit?

Superannuation is a type of voluntary benefit extended to employees of an organization. When an employee retires he no longer gets a salary but his need for a regular income continues. Retirement benefits like Provident fund and Gratuity are paid in lump sum which is often spent so quickly or not invested profitably with the result that the employees would find himself without a regular income during his lifetime after retirement. With continuous improvement in longevity of life, the economic problem of old age is now so serious as the calamity of premature death. The superannuation scheme provides an ideal answer to this problem.

2. Is it mandatory for an employer to pay pension to his employees?

No, it is not mandatory for an employer to pay pension to his employees. In respect of a member the employer contributes to the superannuation Fund upto 27% of monthly salary of such member, as reduced by employer's contribution, if any, to any Provident Fund (whether recognized or not) in respect of same member. The member is not required to make any contribution to the Fund. However, in case of contributory Fund a member may make contributions to the Fund and the same will be eligible for rebate under Section 88 of the Income-Tax Act, 1961.

3. What are the types of pension schemes?

Broadly there are two types- Defined Contribution (DC) and Defined Benefit (DB)

i) Superannuation Defined Benefit scheme where the benefit is defined to the member (which normally is a formula linked to salary, years of service, etc.) ii) Superannuation Defined contribution scheme where the Contribution is defined and is tax exempt up to 15% of basic salary; and the Voluntary Scheme.

4. What is a DC scheme?

The first type of benefit is known as defined contribution scheme. Under this type of benefit, the employer makes a contribution once a year (or more frequently in some cases) towards a separately created trust fund or to a scheme administered by an insurer. These contributions earn interest and the accumulated balance of contributions and interest is used to pay the retirement benefit to the employee. Superannuation available under defined contribution scheme has relevance to only total of accumulated contributions and interest and bears no relationship, whatsoever, with the final salary or number of years of service put in by an employee. The defined contribution scheme for superannuation/ pension is, in most respects, similar to the provident fund, so far as the accounting treatment is concerned. It also presupposes payment of contributions every year, either once in a year or more frequently.

5. What is a DB scheme?

The second type of superannuation scheme is the defined benefit scheme. Under this scheme, the benefit payable to the employee is determined with reference to factors such as a percentage of final salary (e.g. the average of one, three or five years' salary), number of years of service and the grade of the employee. The contribution required to finance such a scheme is actuarially determined and is generally expressed as a percentage of salary for the entire group of employees covered by the scheme. For defined benefit superannuation/pension schemes, a trust fund can be created or an arrangement can be negotiated with an insurer so that the annual contributions, calculated actuarially, can be made each year. In such a case, benefits to employees on entitlement would be paid by the trust fund or by the insurer. Alternatively, the superannuation benefit can be paid by the employer as and when an employee leaves.

6. What is meant by accumulation and decumulation / payoff period?

Accumulation period is the one during which the contribution are made. This is generally the working period of an employee, while during the decumulation period benefits are payable, which starts either on the date the member leaves the fund or the Normal Retirement Date.

7. What is commuted value and how is it taxed?

Commuted Value is a lump sum equivalent of annuities. If the member leaves the scheme either on Normal Retirement Date (NRD) or 10 years prior to NRD, then commutation is not taxable. Otherwise it is taxable.

8. What are annuity options?

Different types of annuities are offered by Insurance companies through whom the trust funds purchase annuities. The member has the option to choose any one of the annuities offered. For the purpose of providing annuities for beneficiaries the Trustee shall;

i) Enter into a scheme of insurance with the LIC. Or ii) Accumulate the contributions in respect of each member and purchase an annuity from the LIC at the time of the retirement or death of each member or on his becoming incapacitated prior to retirement out of the scheme existing at the time of retirement or death of member.

9. Is it necessary to form a trust fund?

If a company desires to avail tax benefits on the contributions made to the SA fund, It is necessary to setup up an 'Irrevocable Trust' Fund (which means money once transferred cannot be paid back to the Company) . The trust also affords 'Complete Protection to the Employees' in respect of their pension as a service benefit, so far as no part of the contribution paid by the employer into the Trust can go back to the Company under any circumstances. The creation of a Trust is, therefore, of great advantage to the employees also, from the employees' perspective it is non - taxable. This trust is approved under the IT Act, 1961, therefore contribution by the Company is nontaxable in the hands of Company's employees.

10. How the Past Service liability prior to the formation of the trust is funded and is it compulsory? The Past Service liability is funded in installments or in one lump sum at the time of formation of the trust based on an Actuarial valuation for DB Schemes. Under a DC scheme it is optional. However, in case of DB scheme it is compulsory and determined by an actuarial valuation. i) Enter into a scheme of insurance with the LIC. Or ii) Accumulate the contributions in respect of each member and purchase an annuity from the LIC at the time of the retirement or death of each member or on his becoming incapacitated prior to retirement out of the scheme existing at the time of retirement or death of member.

11. What is the procedure for payment of pension?

On cessation of employment of the member, (on retirement- before or after retirement date, death or leaving service) and subject to the member having completed specified years of service (if any provided in the Trust Rules) with the company, the Trustees will arrange to purchase a pension on the life of the member from out of the accumulation lying to the credit of member, as reduced by commuted amount, if any, in the Fund on the date of cessation of employment. If the cessation occurs due to death of the member the pension will be purchased on the life of the beneficiary. The pension offered by the trustees will be of the type offered by LIC and selected by the member/beneficiary on the date of cessation of employment out of the scheme available at that time with the LIC.

If a member has not completed specified years of service with the company, the accumulation lying to the credit of the member shall be forfeited to the Fund. For the purpose of completed year of service member's service with associated concern shall also be considered.

12. What are the tax liabilities of pensionary benefits?

During Employment

i)	The employer's contribution will not be treated as perks in the hands of the employees, and thus are 'Tax-Free'.
ii)	Interest received on Superannuation Fund is tax-free.

At The Time of Retirement (Superannuation)

i)	The Commuted Value payable on retirement is free of 'Income-Tax'.
ii)	The corpus that remains after providing for the commuted value (Purchase price) is tax-free. Annuity (pension) on such purchase price is, however, taxable.

On Death
In case of death of an employee, all benefits available under the Scheme are 'tax-free' in the hands of the beneficiaries (heirs).

On Withdrawal

i)	The "Equitable Interest "(i.e. the total corpus of the employer) of an employee can be transferred to the new employer provided the Rules of both the Trusts / Schemes provide for the same.
ii)	The employee can opt for a pension from the normal retirement date provided in the old employer's scheme.
iii)	Any payment to an employee in lieu of or in commutation of an annuity on his becoming incapacitated prior to retirement is also 'tax-free'. Commutation will be received by the Company's Superannuation trust and passed on to employee as net of applicable income tax. Annuity cheque will be directly sent to the ex-employee. Income tax, if any, will be borne by the ex-employee.

On leaving the job
If the new company has Superannuation fund, the employee can get the amount transferred under superannuation from the Company's trust to the new trust. Such a transfer does not entail tax.

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