Superannuation Fund: How It Works and Tax Treatment (Tax Year 2026-27)
CA Meet Dhrangadhariya 
April 1, 2026
CA Meet Dhrangadhariya April 1, 2026
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Last updated: 01 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP
Quick summary
A superannuation fund is a company pension arrangement. The employer sets up a trust, puts money into it each year, and the fund pays an annuity or pension to the employee after retirement. It is part of the cost to company (CTC) for many employees, so it matters to know what is taxed and what is not.
The Income-tax Act, 2025 gives benefits only to an approved superannuation fund. Under Schedule XI, Part B, the approving authority (a Commissioner) approves a fund that meets these conditions:
The trustees apply to the Assessing Officer in Form 188 (Rule 313 of the Income-tax Rules, 2026). The income of an approved superannuation fund is itself exempt (Schedule VII, serial 23).
At retirement the fund buys an annuity from an insurer. Common options are an annuity for life, for life with a guaranteed period of 5, 10 or 15 years, for life with return of the purchase price, or jointly for husband and wife.
The employer’s contribution to an approved fund is not taxed in the employee’s hands, up to a combined limit. Under section 17(1)(h) the total of the employer’s contributions in a tax year to:
is a perquisite only to the extent it is more than ₹7,50,000. The yearly interest, dividend or similar accretion on that excess is also a perquisite (section 17(1)(i), worked out under Rule 16).
Example: the employer pays ₹4,00,000 into the provident fund, ₹2,50,000 into NPS and ₹2,00,000 into the superannuation fund in the year. The total is ₹8,50,000. ₹1,00,000 is taxable as a perquisite.
If the employer instead pays a life insurance premium or buys an annuity for you, it is taxable as a perquisite, except where it goes to an approved superannuation fund, a recognised provident fund or the deposit-linked insurance fund (section 17(1)(g)).
The employee’s own contribution to an approved superannuation fund is one of the items that qualify under section 123 (paragraph 1(g) of Schedule XV). With the other qualifying items such as provident fund and life insurance it must stay within ₹1,50,000. Section 202(2) bars Chapter VIII deductions in the new regime, so this deduction is available only in the old regime.
| Payment | Treatment |
|---|---|
| Paid on the death of a member | Exempt |
| Lump sum in lieu of or in commutation of an annuity on retirement at or after the specified age, or on incapacity before retirement | Exempt |
| Refund of contributions on the death of a member | Exempt |
| Refund of contributions to an employee leaving service otherwise than by retirement or incapacity | Exempt only up to contributions made before the Act’s commencement and interest on them, so in practice taxable |
| Transfer to the employee’s account in the notified pension scheme (NPS) | Exempt |
| Annuity or pension received later | Taxable as salary (section 16(b)) |
| Employer’s contribution and interest paid to the employee on leaving service | Taxable as profits in lieu of salary (section 18(1)(c)(ii)), with tax deducted by the trustees at the average rate of the previous three years (Schedule XI, Part B, paragraph 7) |
The exempt payments are listed at serial 8 of Schedule II.
The trustees must report to the tax department each such payment made during an employee’s lifetime, within two months of the end of the financial year, giving the contribution repaid and the tax deducted.
The employer’s contribution to an approved superannuation fund is deductible as an expense of business (section 29(1)(a)), subject to the limits the rules set for approval. The employer also reports its payments to the fund in the salary statement (Schedule XI, Part B, paragraph 8).
They are not the same thing. Retirement is leaving work at a certain age. Superannuation is a fund that helps pay for life after that.
A trust set up by an employer, usually with an insurer, to provide annuities or pensions to employees on retirement at a specified age, on incapacity before retirement, and to dependants on death. The employer must contribute to it.
Not up to ₹7.5 lakh in a tax year. That limit covers the employer’s contributions to a recognised provident fund, the notified pension scheme (NPS) and the approved superannuation fund together. The excess, and the yearly interest or dividend on it, is a taxable perquisite.
Yes, under section 123 (Schedule XV, paragraph 1(g)) within the overall limit of ₹1,50,000 with the other qualifying items, but only in the old tax regime.
An annuity or pension is salary (section 16(b)) and is taxed when received. The lump sum paid in commutation of an annuity on retirement at or after the specified age, or on incapacity, is exempt.
The employer’s contribution and interest paid to you during your lifetime on leaving service is taxable, and the trustees deduct tax at the average rate you paid over the previous three years (or your period in the fund if shorter). Your own contribution is not taxed again.
No. The trustees apply to the Assessing Officer in Form 188 and the approving authority (a Commissioner) grants approval if the fund satisfies the conditions in Schedule XI, Part B of the Act. Only an approved fund gets the benefits described here.
This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.
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