Corporate Pension Schemes — Superannuation Fund Management

The statutory layer

Some retirement benefits are required by law. The Employees' Provident Fund now sits under the Code on Social Security, 2020, in force from 21 November 2025, which subsumed the earlier provident fund and gratuity Acts. It applies to establishments with 20 or more employees. Employer and employee each contribute 12% of wages; out of the employer's 12%, 8.33% of wages goes to the Employees' Pension Scheme. The wage ceiling remains ₹15,000 a month.

Gratuity under the Code is 15/26 × last drawn wages × years of service, where a part-year of more than six months counts as a full year, with a ceiling of ₹20,00,000. A fixed-term employee now earns gratuity pro rata after one year of service (earlier five).

Superannuation: the employer's own scheme

A superannuation scheme is a pension arrangement an employer sets up for its employees, alongside the statutory benefits. No law fixes the employer's contribution rate: each scheme sets it in its own rules, for example as a percentage of basic salary, and the rate differs from one employer to another.

The fund may be run by a life insurer or by a trust the employer sets up. Group superannuation, group gratuity and group leave-encashment schemes are employer-employee group products that life insurers are permitted to offer under IRDAI's Master Circular on Life Insurance Products of 12 June 2024. Many employers also contribute to their employees' NPS accounts.

Defined benefit, defined contribution and who bears the risk

In a defined-benefit scheme a formula fixes the pension, and the employer carries the risk of a shortfall if the fund proves too small to pay it. In a defined-contribution scheme the benefit is whatever the contributions and their investment returns add up to.

So in a defined-contribution scheme invested in unit-linked, market-linked funds, the employees who are members bear the investment risk. Where an insurer guarantees a benefit, the insurer bears the risk on that guarantee. Risk allocation follows scheme design, not the label on the scheme.

Tax treatment

Since the Finance Act, 2020, an employer's contributions to an employee's provident fund, NPS and superannuation fund are added together, and the part above ₹7,50,000 in a year is taxed in the employee's hands as a perquisite. The limit applies to the total across the three, not to each separately.

An employer's NPS contribution is deductible for the employee under section 124(2) of the Income-tax Act, 2025 (old section 80CCD(2)) up to 14% of salary for a government employer and 10% for others; under the new regime 14% applies to all.

A pension or annuity received after retirement is fully taxable in the year it is received. Some lump sums, such as a commuted pension or gratuity, can be exempt within the limits of section 19 of the Act.

Rules at a glance

Key points

• Provident fund and gratuity are statutory benefits under the Code on Social Security, 2020; a superannuation scheme runs under the employer's own scheme rules.
• The employer's superannuation contribution rate is fixed by the scheme's own rules, not by law.
• In a market-linked defined-contribution scheme the members bear the investment risk; in a defined-benefit scheme the employer carries the risk of a shortfall.
• Employer contributions to EPF, NPS and superannuation above ₹7,50,000 a year in total are taxed as the employee's perquisite.
• A pension or annuity received after retirement is fully taxable.

Common misunderstandings

• There is no prescribed employer contribution rate for superannuation: each scheme's rules set it.
• The ₹7,50,000 limit is not per fund: provident fund, NPS and superannuation contributions are added together.
• A superannuation pension is not tax-free because the employer funded it: the pension or annuity is fully taxable when received.
• Members of a defined-contribution scheme are not promised a fixed pension: the benefit depends on contributions and what they earn.

Questions people ask