Those of us who still have many years to go before opting out of the rat race tend to think of retirement in terms of fuzzy cliches -- tending to the roses, long walks by the sea, playing golf on weekdays, pottering around the house and so on. But those staring retirement in the face invariably think of grimmer things like steep medical costs, taxes, inflation and the rising cost of living, and of whether their savings can meet all these expenses.
Most salaried people have realised that for their retirement kitty to show any signs of health, they must invest in equity, despite the market's recent volatility. "Exposure to the markets is risky, but ever since the defined benefit pension has gone, one has to take risks," says Raghavendra Rao, manager, Nicholas Piramal.
Unfortunately, investment options for building up a retirement fund are few. As a salaried individual, you must be part of a provident fund, which is mandatory. You can also opt for an individual pension plan or a superannuation scheme, if your employer does offer such an option.
Most Indian companies don't offer such an option. Explains Amit Gopal, vice president, India Life Capital, a company that advises on superannuation and provident funds: "As superannuation is not mandatory and more often is for employees at a certain level, the employer has to see good reasons to float a superannuation fund."
Even when companies do offer such plans, few employees opt for them. And this is sad, because a superannuation plan is a good option to augment your existing retirement plan. 'It's a voluntary pension plan catering to the retirement needs of the employee, and ensures he receives a pension after his retirement,' says Aneesh Khanna, associate vice-president, Kotak Life Insurance. Offered by insurance companies, superannuation can be a good option for employers to plan for the increasingly crucial post-retirement days of their employees. It also acts as an incentive for the employee to stick to such organisations.
- Up to 27% of your basic pay and dearness can go to PF and superannuation.
- Rs 1 lakh (Rs 100,000) contribution is exempt from FBT.
- Interest accrued on accumulation is not taxed.
- On vesting, a third of the corpus encashed is tax free.
Superannuation plan has to be set up as an income tax recognised trust that can be administered internally, but is typically managed and administered by an insurance company. "The employer appoints the trustees and drafts the trust deed and rules in consultation with the insurance company that runs and administers the scheme," says Rao. And because the employer only acts as a facilitator, a superannuation plan is designed to serve the interests of employees. The employee gets a sizeable corpus if he has invested in a well-crafted superannuation plan.
Moreover, employers find reasons beyond incentives to set up the fund. "Initial contributions made to an approved superannuation fund can be claimed as business expenditure under the current tax laws," explains Khanna.
The fringe benefits tax (FBT) took some sheen off superannuation schemes in 2005-06. "Prior to the FBT regime, contributions to the scheme were made either by the employer alone or by both the employer and the employee. Now, however, only the employees contribute," says Rao. So, while that's still not bad news for employers, employees are stuck.
Most companies floating such schemes preferred doling out the contribution to the employee as cash to paying a significant 33.33 per cent fringe benefit tax on superannuation contributions. But given a choice, several employees would like the superannuation plans to continue -- FBT or no FBT. Tarun Vashistha, a senior manager with a consulting company in Bangalore, says: "I stuck to the superannuation contribution even with the FBT, as it is a systematic disciplined retirement contribution. The change in tax treatment in Budget 2006 for superannuation contribution has only strengthened my belief in it."
With the budget this year removing the Rs 10,000 cap on individual pension contribution in pension plans, you can technically contribute Rs 1 lakh a year to your retirement plan and avail of tax benefits. "There are many employees who felt left out after the double blow of FBT on superannuation and the cap on personal contribution to pension plans. With a variety of financial instruments now being clubbed under Section 80C, one can actually park the entire sum towards retirement planning," says P V Srinivasan, vice-president, taxation, Wipro Technologies.
"The confusion over FBT put our plans to start a superannuation trust on the backburner, and was a dampener to many who were looking forward to contributing to their retirement in a disciplined way," says C P Toshniwal, head of corporate planning, Pantaloon Retail
Today, the company has over 2,000 members in its superannuation trust and they are all happy to avail of tax benefits, while contributing to their retirement corpus.
Considering the long tenures of such plans and the substantial monthly contribution they entail, there is scope to build a significant retirement nest. Moreover, the tax advantages are a good incentive to include these schemes in to your retirement planning basket.
Under the current income tax rules, the total contributions towards provident fund and superannuation cannot exceed 27 per cent of the salary (basic plus dearness allowance). So, after the mandatory 12 per cent contribution to the provident fund, you are left with a maximum contribution of 15 per cent to the superannuation fund. "Currently, the ceiling to this figure works out to Rs 1 lakh a year or Rs 8,333 a month," says Tarun Chugh, head, group & alliances, ICICI Prudential Life Insurance.
The industry norm for basic salary with dearness allowance (DA) is pegged at 30 per cent of CTC. So, to avail of the full Rs 1 lakh benefit under superannuation schemes, the CTC works out to be Rs 22.22 lakh (Rs 2.222 million) or a monthly basic and DA component adding up to Rs 55,556. "This makes a strong case for superannuation amongst the salaried class that draws a large sum," explains Vivek Khanna, director-marketing, Aviva Life Insurance.
There's more good news on the tax front, contributions made each year to the trust qualify for income tax exemption, and this works as an incentive for many in the senior ranks to accelerate accumulation.
Further, under the present laws, on retirement the employee can withdraw one-third of the accumulated corpus, which is tax-free in his hands. The balance two-thirds is used to buy an annuity, which is treated as income and taxed accordingly.
What it's about
Once you are part of a superannuation trust, your employer deducts a regular monthly contribution, though some employers work out a quarterly and half-yearly option. What this means is the superannuation fund works like a mutual fund, and the fund manager, the insurance company in this case, offers you a choice of fund options.
IRDA allows insurance companies to park up to 60 per cent of the fund into equity markets. Some, however, offer a choice of fund options to participant employees to suit their risk appetite. There is the equity-heavy growth option as well as a debt option with insurers throwing in at least two variants in between.
Till very recently, employees preferred equity-heavy funds, as this allowed them to add large amounts to their corpus. According to Rao, even those close to retirement are willing to take risks by parking their contribution to equity-heavy plans. However, all insurers offering superannuation also take into account the flexibility that these plans should offer. "We offer four switches a year between our four fund options, and if one wishes to exercise a fifth, it costs 0.5 per cent to switch. But, I am yet to come across anyone making so many switches in a year," says Chugh.
Is it for you?
An employee with a high CTC has everything to gain from contributing to a superannuation plan. There are advantages even for those who may not be making that much money. However, as Gopal warns, it is important to remember that tax laws are changing constantly. "In its current form, there is exemption on contribution to these funds, and there is a partial exemption on vesting. One will have to live with the fear of being taxed at some point even on the contributions in the accumulation stage, making these options less attractive," he says.
Toshniwal has a different problem altogether. "The average age of employees in my company is only 25, and most of them will join the superannuation trust with a 25-year horizon. What will happen when one changes jobs or the tax structures change," he asks.
Under the present laws, you can transfer your superannuation contribution to your new employer if he has an existing superannuation trust. However, warns Chugh: "If one pulls out of the plan before reaching vesting, owing to a new job, the proceeds are treated as income and can have a huge tax liability."
And, as is the case with all investment managers, one must realise that though insurers are mandated to run a superannuation fund, most bundle a group term plan and also try selling you an annuity at the time of vesting. Stay away from the insurance component if you think you can handle it better on your own. Moreover, insurers charge a nominal fee for fund management, which should be understood before entering a scheme.
In the absence of an effective social security mechanism, contribution to superannuation funds is important and this move (exempting Rs 1 lakh contribution a year from tax) will help protect the future of employee members. And, of course, employers are being hailed as being wealth creators for setting up such trusts, and dangle superannuation as the carrot to retain employees.