Superannuation Funds: Time to re-examine the structure

Employer sponsored superannuation scheme were very popular in India, especially on account of the tax rules relating to the same. The modus operandi was that the employer would create a superannuation fund (SAF) Trust and have the same approved from the Income Tax Authorities.  The employer would thereafter contribute for its employees in order to provide retirement benefit to its employees. A superannuation fund is a voluntary tax-advantaged pension plan that can act as a supplementary social security pillar in addition to the mandatory occupational plans run by Employee Provident Fund Organization (EPFO). Constitution of a superannuation fund The Fourth Schedule of the Income Tax Act, 1961 (the Act) has stated certain prerequisites for approval of a SAF: � The SAF must be established by an employer in India as an irrevocable trust and not less than ninety percent of employees must be employed in India; � The SAF trust must have a minimum of two trustees and all trustees must be resident in India; and � The sole purpose of the SAF must be the provision of annuities to employees on retirement or after a specified age if they become incapacitated or to the dependents in case of death of an employee. Contributions The annual contribution by the employer to a SAF for any particular employee can be a maximum of twenty-seven  percent of his salary for each year minus the employer's contribution, if any, to any provident fund (whether recognized or not) in respect of the same employee for that year. Investments All moneys contributed to the fund can be invested in a Post Office Savings Bank Account in India or in a regular savings or current bank account with any scheduled bank or invested according to the investment pattern stipulated by the Act for pension funds and recognized provident funds. However, the returns generated by the above three options could be very different for the employees. Benefits 1) Retirement: One-third of the accumulations (contributions plus interest) can be taken as a tax-free lump sum payment and the remainder is used to buy annuities. 2) Resignation: The employee can get the equitable interest transferred to the superannuation plan of the new company if the rules of both the Schemes provide this facility or opt for a pension from the normal retirement date mentioned in the plan. Tax Provisions Employer: The annual contributions by employer are treated as a deductible business expense in term of Section 36(1) (iv) of the Act. Employee: As per section 17(2)(vii) of the Act, the contributions paid by the employer to the extent it exceeds One lac rupees are treated as perquisites in the hands of the employee. Prior to April 2005, the entire employer contribution to the SAF was exempt from tax in the hands of the employee (subject to the overall cap of 27 per cent of basic salary). As per Section 10(13) of the Act, the benefits payable on death are exempt from tax. According to Section 10(10A)(ii) of the Act, the specified commuted value (one half if employee not eligible for gratuity and one third if employee not eligible for gratuity) on retirement or otherwise is tax-free. Issues and challenges The number of superannuation funds in India, the number of subscribers and the total corpus of the superannuation accounts is not available in the public domain. This has happened because there is no national regulator of the superannuation funds in India. Since the approval takes place at the local income tax office, the data is available with the local offices. Apparently, the data is not compiled at the national level. After the advent of the National Pension System (NPS) which has a modern architecture for collecting contributions, recordkeeping and investment of funds, there is a case for examining the possibility of opening the superannuation accounts directly with the NPS. The NPS is monitored by an independent regulator Pension Fund Regulatory and Development Authority (PFRDA). Also, with employer contributions in excess of One lac becoming taxable, SAFs have not remained equally unpopular. Hence, employers are exploring alternatives to SAF for providing the second layer of social security to their employees. It remains to be seen whether the NPS can fill this gap.