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Sunday, March 19, 2000



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LIC superannuation scheme -- Retirement benefits for corporate employees

K. Rafee Ahammed

THE term `superannuation' refers to a person reaching the age of retirement. While the retirement age is fixed at 55 in certain private companies, 58 is more common. A few years ago, the Centre raised the retirement age of its employees from 58 to 60. A number of State governments too followed suit, though some retained it at 58.

This article considers the superannuation scheme introduced by the Life Insurance Corporation. It is a non-contributory scheme for the employees which means only the employers contribute. The scheme operates under a master policy issued by the LIC, and t he employer is liable to pay a certain percentage of the salary as premium every year. The premium may range from 5 per cent to 15 per cent and the employer may opt to pay the same percentage for all its employees or pay different percentages for differe nt categories of employees.

For instance, a company may decide to pay the same percentage, say, 15 per cent, for all its employees. Or, it may pay 6 per cent premium for its supervisory staff and 15 per cent for its managerial cadre.

Two `Master Policies' have been introduced by the LIC: The Deferred Annuity Scheme and the Cash Accumulation Scheme. The former is less beneficial than the latter, under which, the contribution by the company on each renewal date would be accumulated at the rates of interest declared by the LIC from time to time.

Such interest rates would be higher than those under the deferred annuity scheme. Moreover, the benefits would be passed on to the members of the scheme without any administrative charge being levied.

Further, on leaving the services of the company, whether by resignation or retirement, various options are available to the annuitants. In the event of the death of a member while in service, the nominee would become eligible for the pension benefits.

The various options available are:

AGetting the full corpus amount in a lump-sum subject to deduction of income-tax, if applicable. However, certain companies would incorporate certain restrictions in their superannuation scheme rules.

For instance, a member may be eligible to draw pension only on completing a specified period of service, say, 5 years. Alternatively, the members may be allowed to avail pension benefits irrespective of their service as given below:

Less than 3 years: 25 per cent of corpus fund;

3-5 years: 50 per cent;

5-10 years: 75 per cent; and

Above 10 years: 100 per cent.

The unsettled amount shall be returned to the trust by the LIC and the amount may be used by the trustees for for future premium payments.

Retaining the entire corpus amount till normal retirement date (that is, up to 55 or 58 years as the case may be) and start getting pension benefits thereafter;

Getting pension on the total corpus (without getting any commutation) on a monthly/quarterly basis;

Getting one-third commutation value of pension corpus amount (maximum limit allowed under the I-T Act in normal circumstances) immediately and get the pension out of the balance corpus amount monthly/quarterly.

In the latter two cases, members may opt for the return-of-the-capital scheme, under which the annuitant will start receiving the monthly or quarterly pension subject to the assurance that in the event of the death of the annuitant, the corpus amount at the time of getting the first instalment of the pension would be returned to the annuitant's nominee.

Here, again, the original pension corpus amount would be treated as an ordinary endowment policy and bonus declared by the LIC for those years (intervening period) would be added and returned alongwith the corpus amount. This can be explained as in the t able.

Any amount received as pension before the normal retirement date would be taxable as salary income under Section 17(1)(ii) of the I-T Act, 1961.

However, under Section 1O(10A)(ii) of the Act, any payment of commutation of pension received under any scheme of any other employer, to the extent it does not exceed in a case where the employee receives any gratuity, the commuted value of the one-third pension he is entitled to and, in any other case, the commuted value of one-half of such pension.

Therefore, it is suggested that pension benefits be availed after the retirement date in the normal circumstances. However, it varies on a case-to-case basis as, in the case of death, the nominee of the deceased member can opt only for pension for life a nnuity with the return of capital on death. Here, again, the pension value depends on the corpus amount and the age of the beneficiary, and so on, at the time the beneficiary starts to receive the pension.

Further, wherever the scheme permits a certain percentage of withdrawal in lumpsum (say, 25 per cent, 50 per cent, 75 per cent and 100 per cent, as the case may be) which may depend on the length of service, it is advisable to take the full amount of pen sion after considering the tax implications.

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