Superannuation funds: Firms may take a break

Insurance firms are betting on a waiver of the FBT on superannuation funds.

Insurance companies are asking their corporate clients to take a premium holiday on contributions towards superannuation funds this financial year.

This is a signal that the insurance companies are betting on a waiver of the fringe benefit tax (FBT) on superannuation funds in the next Budget.

A premium holiday means that the companies will not make any contribution directly to the fund for one year but pay their employees the amount in cash. Alternately, the corporate entities can make good the one-year premium holiday by paying the amount next year.

The government is understood to be relooking at levying FBT on superannuation funds. According to sources close to the ministry, a committee is reviewing the matter considering the fact that in Australia, where the concept of FBT has been adopted, the tax does not apply to superannuation funds.

Many corporates are deliberating on whether to continue with their superannuation funds in view of FBT on the entire contribution. Even if they decide against continuing with the scheme, the tax laws do not permit termination of the existing fund.

"Superannuation funds are set up as irrevocable trusts that cannot be closed down as they receive a tax break up to the date of superannuation," said Tarun Chugh, head group solution, ICICI Prudential Life Insurance Company.

Some insurance companies are in talks with their clients as to how best the tax can be handled.

"We will approach our clients individually to suggest converting the company's superannuation fund into individual pension plans," said a senior LIC official.

The plan is to follow the UK model where corporates offer superannuation schemes to their employees through individual pension plans, he added.

According to tax officials, another option open to the government is to tax only 30 per cent of the contributions made by corporate entities. This will help reduce the bulk of the tax incidence on corporate tax pay out.

"We expect a total hit of Rs 3 crore on account of the fringe benefit tax. This will include Rs 1 crore tax on our superannuation fund," pointed out M R Rajaram, chief financial officer & executive director, ICI India Ltd.