Planning for life after work is one of the most vital financial commitments, which will ensure a continued income stream for your daily living expenses and other related costs.
Two popular financial avenues that working professionals in India follow to create an income stream for post-retirement life are traditional superannuation schemes and purchasing an annuity in NPS (National Pension System).
Although both these financial avenues create an income source for the post-retirement period, they differ in terms of flexibility, tax provisions, etc. Knowing the key differences in the working mechanism and benefits of both avenues will assist you in choosing the best combination to secure a future-ready financial plan.
What Is Superannuation?
A superannuation fund is an employee benefit plan established by a firm providing financial security to its employees in the form of a pension on retirement.
How It Works
- Contributions: The employer contributes specific percentages from the basic salary plus the dearness allowance into an approved group superannuation trust or fund. In many corporate setups, employees can also deposit money of their choice in an approved group superannuation trust or fund, which the company matches on a matching or higher contribution basis.
- Accumulation: The deposits in the employer’s superannuation fund grow over time, with returns generated either by a corporate trust or a life insurance company.
- Payout on Retirement: You can receive a certain percentage of the total deposits in a superannuation fund as a tax-exempt lump sum on retirement. The rest of the amount in the superannuation fund has to be used to buy a pension plan, which will provide a source of regular income.
Since superannuation funds are tied up with the employer, switching jobs might allow you to transfer the superannuation fund amount to your new employer’s approved superannuation scheme or hold it till retirement, as per the terms and conditions of the superannuation trust.
What Is an Annuity in NPS?
The National Pension System (NPS) is a voluntary pension program established to build a retirement corpus, wherein the annuity represents the pension received upon exiting the scheme.
How It Works
- Contributions: You can deposit regularly into your NPS (Tier-1) account in your working career. Additionally, your employer can also make contributions towards your NPS retirement account.
- Flexibility: You can choose the asset allocation in your NPS account between corporate bonds, government securities, equity, and alternate assets.
- Payout on Exit: As per the current NPS rules, upon attaining age 60, you must use at least 40% of your total NPS corpus to buy an annuity plan from an IRDAI Approved Annuity Service Provider (ASP), while the remaining 60% can be withdrawn as a lump sum at that stage of life.
How Tax Rules Apply To Both the Options
Tax planning plays an integral part when it comes to managing your retirement funds. When it comes to understanding the tax implications, deductions, and exemptions applicable on the superannuation fund and the NPS annuity, working professionals in India need to refer to the New Income Tax Act 2025. Here are the key aspects:
1. Contributions and Accumulation
- Employer Contributions Limits: As per the current tax exemptions, employer contributions to recognized provident funds, superannuation funds, and the National Pension System are tax-exempt up to an aggregate limit of ₹7.5 Lakh per year. This means that any higher contributions beyond this combined ceiling get treated as a taxable perquisite under the hands of the employee.
- National Pension System Deductions: Salary employees can claim tax deductions on the NPS contributions they make as an employee up to the applicable limits as per the provisions of the New Income Tax Act 2025. Additionally, employer contributions up to 10% (14% in the case of government and covered employees) of basic salary are also eligible for tax relief as per the currently applicable rules.
2. Lump Sum Withdrawals on Exit
- NPS Lump Sum: When you exit NPS at age 60, the amount withdrawn as lump sum that is up to 60% is completely exempt from income tax.
- Superannuation Lump Sum: The commuted lump sum amount received from an approved superannuation trust at retirement enjoys tax exemption limits as on the statutory rules.
3. Monthly Pension and Annuity Taxation
- Regular Income Stream: The monthly income that you receive from a superannuation pension/annuity bought using your superannuation balance or NPS corpus are taxed as regular income in the year of receipt based on the applicable slab rates as per the New Income Tax Act 2025.
Annuity Options Available To Employees
When you buy an annuity in NPS or convert your superannuation balance into a pension, life insurance agencies offer multiple payout formats. Choose the most appropriate annuity option that suits your lifestyle:
- Life Annuity: The annuity option wherein the life insurance company pays a fixed monthly pension for as long as the annuitant survives. The annuity payments stop upon death of the policyholder.
- Joint Life Annuity: The annuity option wherein the life insurance company pays a monthly pension as long as the first annuitant survives and continues to pay the monthly pension to the surviving nominee on the death of the first annuitant.
- Annuity with Return of Premium: The annuity option wherein the annuity buyer is assured a regular pension for life; however, upon the death of the annuitant, the original annuity amount is paid back to the nominee.
- Increasing Annuity: Annuity option wherein the monthly pension amount increases at a simple percentage every year.
Note: Annuity rates, options, and payout amounts vary across life insurance companies and are subject to the terms & conditions as specified by the insurer.
Which One Should You Prioritise?
You do not necessarily have to choose only one of the options. Many professional employees prefer having a company superannuation plan and an active NPS account.
While making your decision, consider the following: go with NPS if flexibility, complete transferability in case of job switches, and tax-free lump sum withdrawal (up to 60%) at age 60 are something you desire.
On the flip side, opt for superannuation schemes if your company superannuation plan offers attractive employer contributions, conservative growth rates, and a hassle-free savings mechanism without investing additional time and effort in managing the superannuation corpus.
Conclusion
Creating a sustainable source of income requires continuous effort and commitment. Both the superannuation schemes and the purchase of an annuity in NPS can help you secure your future and maintain financial stability after retirement. Assess your current employer’s benefits, anticipated income requirements for retirement, and the available annuity options with the life insurance companies. You might even want to speak with a qualified financial planner to help you identify the ideal retirement income option.
