Group Superannuation — Defined Benefit vs Defined Contribution
Group superannuation is a retirement scheme an employer sets up to give employees a pension. This lesson explains defined benefit and defined contribution schemes, who carries the investment risk in each, and the tax rules on employer contributions and commuted pension.
What it is
Group superannuation is a retirement scheme that an employer sets up, over and above the statutory provident fund, to give employees a pension. It is funded through a life insurer or a trust. It is a voluntary benefit: the employer decides whether to offer it and on what design.
Two designs, two risk-bearers
In a defined benefit (DB) scheme a formula fixes the pension in advance, based on salary and years of service. The promise is the benefit. If the investments earn less than expected, the employer has to put in more to keep the promise. The employer therefore carries the investment risk.
In a defined contribution (DC) scheme the contributions are fixed, and the benefit is whatever those contributions and their returns add up to. Nothing about the final amount is promised. If returns are poor, the retirement fund is smaller. The employee therefore carries the investment risk.
A quick way to remember it: whatever is defined is certain, and the risk sits with the party on the other side of that certainty.
Tax on the employer's contributions
Since the Finance Act, 2020, an employer's contributions to an employee's recognised provident fund, the NPS and an approved superannuation fund are added together. To the extent the total exceeds ₹7.5 lakh in a year, the excess is taxed as a perquisite in the employee's hands.
This applies in addition to any limit on an individual scheme. Older material mentions a separate ₹1.5 lakh limit for superannuation; there is no such separate limit today.
Tax on the pension
Pension paid periodically is taxable income. Commutation means exchanging part of the pension for a lump sum. Where a non-government employee commutes part of the pension from the employer's scheme, section 19 of the Income-tax Act, 2025 (section 10(10A) of the 1961 Act) exempts the commuted value of one-third of the pension if gratuity is also received, and of one-half if it is not. A government employee's commuted pension is fully exempt. These fractions are limits on the tax exemption. They do not say how much of a superannuation benefit may be commuted, which depends on the scheme's own rules and is not covered here. The pension that continues after commutation remains taxable.
Rules at a glance
Illustration: a weak market year
Two imaginary companies run superannuation schemes. The first promises a pension worked out by a formula from final salary and years of service. The second contributes a fixed percentage of salary each year into each employee's account.
Investment returns are poor for several years. In the first company the pension promised does not change, so the company has to contribute more to make up the gap. In the second the company's contribution does not change, and each employee's accumulated fund, and so the pension it can provide, is lower.
The ₹7.5 lakh perquisite test (assumed figures)
- Assume that in one year an employer contributes for a senior employee: ₹4,20,000 to the recognised provident fund, ₹3,00,000 to the NPS and ₹1,50,000 to an approved superannuation fund.
- Add the three: ₹4,20,000 + ₹3,00,000 + ₹1,50,000 = ₹8,70,000.
- Compare with the threshold: ₹8,70,000 − ₹7,50,000 = ₹1,20,000.
- The excess of ₹1,20,000 is a taxable perquisite in the employee's hands.
Result. Of the ₹8,70,000 contributed, ₹1,20,000 is taxed as the employee's perquisite for that year.
Key points
- Group superannuation is an employer's voluntary pension scheme, funded through a life insurer or a trust.
- Defined benefit: a formula fixes the pension and the employer bears the investment risk.
- Defined contribution: the benefit depends on contributions and returns, and the employee bears the investment risk.
- Employer contributions to provident fund, NPS and superannuation above ₹7.5 lakh a year in total are a taxable perquisite.
- There is no separate ₹1.5 lakh superannuation limit today.
- A non-government employee's commuted pension from the employer's scheme is exempt for one-third of the pension if gratuity is also received, one-half if not.
- Periodic pension is taxable.
Common misunderstandings
- In a defined benefit scheme the employee does not carry the investment risk: the employer has to make good any shortfall against the promised pension.
- The ₹7.5 lakh is not a limit on superannuation alone: it applies to provident fund, NPS and superannuation contributions taken together.
- The one-third is not a rule on how much of a superannuation benefit can be commuted, nor one-third of the lump sum received: it is the limit of the tax exemption, the commuted value of one-third of the pension, where gratuity is also received.
- Commutation does not make the remaining pension tax-free: the pension that continues is taxable.
Questions people ask
Who bears the investment risk in a defined contribution scheme?
The employee, because the benefit depends on the contributions and the returns they earn.
Who pays tax on the excess over ₹7.5 lakh?
The employee; the excess is a perquisite in the employee's hands.
What if the retiring employee receives no gratuity?
The exemption then covers the commuted value of one-half of the pension.
What this lesson relies on
- Income-tax Act, 2025 — section 19 (commuted pension)
- Finance Act, 2020 (aggregate limit on employer contributions)
- IRDAI Master Circular on Life Insurance Products (12 June 2024) — group superannuation schemes
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.