A levy that lifts salary

TAX ON SUPERANNUATION FUNDS

The take-home salary of employees of quite a few corporations is expected to see a rise of 15 per cent, thanks to the finance minister's decision to tax superannuation funds.

Many corporate entities not willing to pay 33 per cent tax on their total contribution as proposed under the fringe benefit tax, intend to discontinue with the superannuation scheme.

A few others plan to reduce the actual contribution that goes towards offering retirement benefit to employees, while keeping the quantum of contribution unchanged.

This way, the tax liability will be passed on to the employees. Superannuation, which forms part of employees' cost to company package, is a fund set aside by employers for employees' retirement benefit.

A host of corporate entities such as Procter & Gamble (P&G), Hindustan Lever, ITC, as well as major corporate groups such as the Birlas offer superannuation scheme to their employees.

"It is a good HR policy and a means to retain people," said Anil Jhala, chief financial officer, Birla SunLife Insurance Company.

On retirement, employees can avail of 33 per cent of the corpus amount as a one-time payment, and from the balance two-third, they can buy an annuity product from an insurance company.

On the death of the employee, his beneficiary would get the entire two-third amount, despite pension payments made to the employee when he was alive.

The maximum contribution to the superannuation schemes is capped at 15 per cent. Unlike gratuity, which is mandatory under law, superannuation fund is voluntary.

"Many corporates have decided to wind up their superannuation schemes if the same comes under tax," said Amit Gopal, vice president of India Life that manages provident funds.

If the tax liability on the corporate's contribution is at the rate of 33 per cent, the companies will try to either cash out the scheme and pay to individuals, said Jhala of Birla SunLife.

The finance minister had in his budget address had stated that the country would move towards an EET (exempt- exempt- taxed) system, which essentially means exemption at the time of contribution, exemption at the time of accumulation and taxation at the time of withdrawal.

With the government imposing fringe benefit tax on superannuation contributions, this amounts to a TET (taxed -exempt -taxed) model, said Suraj Kaeley, chief marketing officer, MetLife India Insurance.

Many of the IT, banking and financial services companies are re-evaluating the proposal, he added.