Provident Fund Scheme for International Workers in India
Foreign workers taking up overseas assignments pay more attention to the tax regime of the country when determining costs, and often tend to overlook the social security laws of the country, which are equally important.
India requires every business entity employing more than 20 workers to register with the national social security system, and makes it mandatory for employees and employers to contribute towards retirement and insurance scheme.
The country’s social security system is governed by the Employees Provident Funds (EPF) Miscellaneous Provisions Act, 1952, which manages the following three schemes:
- Employees Provident Funds (EPF) Scheme, 1952 (Provident Fund Scheme);
- Employees Pension Scheme(EPS), 1995 (Pension Scheme); and
- Employees Deposit Linked Insurance Scheme, 1976.
Provident fund for international workers
In October 2008, India brought foreign nationals working for an establishment in the country – whether a foreign company or a business domiciled in India, under the purview of the EPF Act.
Accordingly, every foreign worker employed with an establishment to whom the EPF applies must become a member of the provident fund (PF) from the first date of his/her employment. There is no minimum period of stay in India for activation of PF compliance.
The PF contribution rate for foreign workers registered with EPF (or IWs) is 12 percent. The PF rate is calculated on full salary of the IW irrespective of whether the salary is remunerated in India or outside India, split payroll, or multiple country sources. The employer contributes an equal amount, with the sum of PF being 13.61 percent of the total wages of the employees.
There is no cap on the salary on which contributions are payable by the employer as well as the employee. An IW can claim an income tax deduction on EPF contribution of up to INR 150,000 (US$ 2,168).
IWs are exempt from contribution towards PF only if their home country has a social security agreement (SSA) or economic-bi-lateral treaty with India.
Social Security Agreements
An SSA is a bi-lateral instrument that protects the interests of the workers in the host country. It allows international workers to avail the following benefits:
- Detachment — avoid double social security contributions;
- Exportability of pension — export the benefits under the SSA to the home country on retirement or on completion of the assignment in India; and
- Totalization of benefits — aggregate service periods rendered in other countries and India to qualify for pension or retirement benefits.
Despite these benefits, very few countries have entered into an SSA with India. This limits the availability of SSA exemptions for international workers from countries like the US and UK, which are yet to ratify an SSA with India.
At present, India has SSAs with 19 countries, out of which 18 are in effect (see the list below).
Withdrawal rules under EPF
An international worker may withdraw the accumulated balance in the EPF account in one of the following situations:
- at the time of retirements, that is, on or after 58 years of age;
- in case of retirement due to permanent and total mental or physical incapacity to work;
- in case of serious illness such as cancer, leprosy, or tuberculosis; or,
- on completion of Indian employment, if the IW’s home country has an SSA with India.
The facility to receive PF refund on the date of completion of Indian employment is not available for IWs who are not covered under SSA.
This makes it challenging for expatriates belonging to a non-SSA country and working in India, as their provident funds are locked-in until they attain 58 years of age. Besides, IWs can withdraw the funds only to an Indian bank account, post retirement – making the entire withdrawal process practically more difficult.
Withdrawal of funds under EPS
The EPS regulations do not recognize the employer’s contribution to the pension scheme. Since only only employer’s contributions are allocated to the EPF, the EPS does not entitle IWs to pension benefits when they leave India, regardless of accrued employer contributions.
The pension withdrawal is only available to employees who are covered under an SSA that has come to effect, and to employees who have not completed the eligible service of 10 years even after including the totalization of service under the respective SSAs.
Editor’s Note: This article was first published in May 2011 and is updated on May 3, 2019, to incorporate latest regulations.