Taxability of Superannuation on Retirement Vs Termination / Job Change

Superannuation is a popular retirement benefit extended by employers to ensure long-term financial security for employees. However, the tax treatment of superannuation fund payouts varies significantly depending on the reason for cessation of employment. This article explores the taxability of superannuation on retirement versus termination or job change, helping employees make informed financial decisions.

What is a Superannuation Fund?

A superannuation fund is a retirement benefit scheme where the employer contributes a certain sum annually on behalf of the employee. Some employers may allow employees to contribute voluntarily. If the fund is approved by the Income Tax Department, it offers significant tax benefits under the Income-tax Act, 1961.

Taxability of Superannuation Fund on Retirement

Exemption under Section 10(13)

When an employee retires after long-term service, the amount received from an approved superannuation fund is fully exempt from income tax under Section 10(13), subject to the following conditions:

• The employee retires from service.
• The payment is received from an approved superannuation fund.

Example:

If Mr. A retires at the age of 60 and receives Rs. 20 lakhs from the superannuation fund (approved), this amount is entirely tax-free.

Taxability on Termination or Job Change

1. Termination due to Incapacity

If the employment is terminated due to illness or incapacity, the superannuation payout is still exempt under Section 10(13), similar to retirement.

2. Termination due to Other Reasons

In case of lay-offs or termination not due to health reasons, the exemption under Section 10(13) may not apply. The amount could be taxable under the head:

• Income from Other Sources, or
• Profits in lieu of salary under Section 17(3)

3. Voluntary Resignation or Job Change

When an employee resigns or changes jobs:

• The superannuation fund amount withdrawn may be taxable.
• However, if the amount is transferred to another approved fund or pension scheme, taxation may be deferred or avoided.

Example:

Ms. B resigns at age 45 and withdraws Rs. 8 lakhs from the superannuation fund. Since it is not retirement or incapacity, this amount is likely to be taxable.

Key Takeaways

• Ensure the superannuation fund is approved to claim tax benefits.
• Retirement and incapacity enjoy full exemption.
• Resignation or job change may trigger tax liability if funds are withdrawn.
• Consider transferring the balance to another eligible retirement fund to avoid immediate taxation.

Check the relevant Section of the Income-tax Act,1961