A superannuation fund is a tax-approved retirement fund that the employer sets up and pays into, so the employee receives a pension or lump sum on retiring. It is separate from provident fund and from NPS, it is optional, and in most private companies it is a benefit for senior grades.

How the fund works

Most Indian private-sector plans are defined contribution: the employer pays a set percentage of basic pay into a trust or an insurer’s scheme every month, and the accumulated corpus buys an annuity at retirement. In a defined benefit plan the promise is a formula, such as a pension linked to final salary and years of service, and the employer carries the investment risk. Vesting and exit rules sit in the trust deed.

Many employers let staff opt out and take the same amount as a cash “superannuation allowance”. That money is ordinary taxable salary. Payroll must capture each election clearly, because it changes monthly TDS and the figure in CTC.

Tax treatment

Employer contributions to an approved superannuation fund are not taxed in the employee’s hands up to Rs 1.5 lakh a year; the excess is a taxable perquisite. On top of that, a combined cap applies: employer contributions to EPF, NPS and superannuation together above Rs 7.5 lakh a year are taxable as a perquisite, along with the yearly accretion attributable to the excess. The cap was introduced in 2020, and the Income-tax Act, 2025 carries it forward from tax year 2026-27 under new section numbers, so verify the reference before citing it.

Worked example: employer EPF Rs 3,60,000, employer NPS Rs 4,20,000 and employer superannuation Rs 1,50,000 add up to Rs 9,30,000. Excess over Rs 7.5 lakh is Rs 1,80,000, which is added to that employee’s taxable salary. NPS has its own rules, see Section 80CCD(1B).

On payout, pension from an annuity is taxed as salary or pension income. Payments on death, and commutation of an annuity on retirement at the specified age or on incapacity, are exempt under the schedule of exempt incomes. A refund on resigning is largely taxable, because only a small legacy portion of old contributions is exempt.

Frequently asked questions

Is a superannuation fund mandatory?

No. Unlike EPF it is not a statutory requirement, and a company decides whether to offer it and for which grades.

How is it different from gratuity?

Gratuity is a statutory payment tied to years of service, while superannuation is a funded employer benefit chosen by the company. See gratuity for how that payout is calculated.

Can the employee contribute too?

Some plans allow it. An employee’s own contribution may qualify under Section 80C in the old regime, but check the plan and the current rules.

What happens to the balance if someone resigns early?

It depends on the trust’s vesting rules, and the refund is taxable as described above.

Model the combined cap for a senior hire in the NPS Employer Contribution Calculator before finalising the package.