Although it is not a statutory liability, Senior employees who do not come under the purview of the Payment of Bonus Act, a pension benefit is an excellent tool for post retirement planning. The employer can contribute to the extent of 15% of the salary (i.e. such contribution along with PF contribution should not exceed 27% of the salary) The employer has an option to privately manage the Fund or go to an Insurance Company. However, in both cases, approval from CIT is necessary to get contribution as tax-deductible expenses.
The services of J. B. BODA can be very resourceful in such a case.
J. B. BODA can:
- Help the company formulate a pension scheme Viz. Define benefits, contribution, formation of non-revocable Trust and appointment of Trustees
- Prepare draft trust Deed & Rules for approval of the company representative
- Inscribe a Trust Deed & Rules on Non-Judicial Stamp Paper of appropriate value as per local laws along with a detailed letter on the company letterhead addressed to CIT and get it executed by the Company and the Trustees
- Receive and submit certified copies of the executed Trust Deed & Rules for approval to CIT
- Follow-up with CIT until approval is received including drafting of Deed of Variation as suggested by the CIT, if any
- Provide administrative guidelines as to opening of Bank A/c. in the name of the Trust, payment to Insurance Company etc.
- Co-ordinate between insurer and the Company to install the scheme.
Frequently asked questions
What are the Tax implications of contributing to a Pension Fund?
If the Pension Fund is approved by the CIT, the employer's contribution is allowed as a business expenses and the employee's contribution is eligible for tax benefit under Sec. 88.
Is the pension Taxable?
Yes, pension is taxed just like salary is, and it is also eligible for standard deduction.
Can the fund be transferred to a new employer?
Yes, the fund can be transferred to a new employer if the new employer has a Pension Fund and ha a provision to receive equitable contribution.
On cessation of employment can part of the fund be encashed?
Yes, on cessation of employment, 1/3rd of the pension can be commuted and will be tax-free, subject to certain conditions.
Can ongoing pension change with the change in the interest rate?
No, once started, pension cannot change with the change in the interest rate. Currently, pension is required to be purchased from an Insurance Company and does not change with the interest rate in the market.