"Until now, foreign nationals working in India and Indian nationals working outside the country were not required to contribute to any social security or pension scheme in India. The recent change is expected to encourage more countries to establish social security totalisation agreements with India. "Foreign nationals working in India and some Indians working abroad for an Indian employer...
"Until now, foreign nationals working in India and Indian nationals working outside the country were not required to contribute to any social security or pension scheme in India. The recent change is expected to encourage more countries to establish social security totalisation agreements with India. "
Foreign nationals working in India and some Indians working abroad for an Indian employer are mandatorily required to make contributions to the Indian Government’s statutory provident fund. These contributions fund two programmes viz.,
(1) the Employees Provident Fund, a compulsory savings programme; and (2) the Employee’s Pension Scheme.
Since October 2008, the Ministry of Labour and Employment in India, has extended the scope of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (the EPF Act) to include international workers (both, Indian citizens working outside the country and non-Indian citizens working in India). They are now required to contribute 12% of their Basic Salary plus Dearness Allowance, which is the cash value of food concession and retaining allowance, matched by an amount equal to the employee’s 12% contribution payable by the employer to the Employees’ Provident Fund Organisation (EPFO). The EPFO implements the Employees Provident Fund Scheme (the “EPF Scheme”), irrespective of the contributions they may be making to such schemes in other countries. Prior to October 2008, foreign nationals on deputation to India were required to contribute towards the EPF Scheme only if their salary was less than INR 6,500 per month. Since almost all such foreign nationals were drawing a salary in excess of this amount, they were not required to make contributions to the EPF Scheme but continued to make social security contributions in their home country. In 2010, there were further amendments, which restricted the withdrawal of contributions made under the EPF Scheme.
The Employees Provident Fund Scheme (EPFS)
The EPF Act provides for the institution of Provident Funds, Pension Funds and Deposit Linked Insurance Funds. Establishments employing 20 or more persons and engaged in any of the 180 industries or classes of businesses (which encompass most activities) specified are covered under the scope of the EPF Act. Also, contributions are mandatory for employees who earn up to INR 6,500. The EPF Act can extend to other establishments that are not mentioned in the EPF Act by way of notification in the official gazette issued by the Government. It is important to note that once an establishment has been under the purview of the EPF Act, it continues to be covered under the EPF Act even if the number of employees is less than 20 at a later date.
Participation in the EPF Scheme is compulsory for employees in almost all establishments in India that meet the basic qualifying criterion of employing 20 or more persons. Since the EPF Act applies automatically to qualifying establishments, the employers are required to file the particulars in the specified format for registration and allotment of business number.
The EPF Act and the relevant rules provide that the Employer’s contribution to the EPF will be at the rate of 12% of the wages, including the basic wages, dearness allowance and retaining allowance (if any), on its part and an equivalent amount on behalf of the employee, which is to be recovered from the employee’s salary.
The EPF Act also provides for exemption from the operation of the EPF Act in certain instances determined on a case-by-case basis. These could be an exemption for the employer from a particular scheme under the EPF Act or an exemption for an individual employee or a class of employees.
The law also provides that an employee may be exempt from the EPF Scheme if he or she is contributing to a social security programme, either as a citizen or a resident, of another country with which India has a Social Security Agreement (SSA) on reciprocity basis, provided such an individual qualifies for such treatment under the applicable SSA.
If an organisation finds that the EPF Act is applicable to it, then it should fill-in the prescribed form for registration. The form along with one or more of the supporting documents should be submitted to the respective provident fund offices for registration.
The statutory contributions are deducted from the salary of the employees and equal contributions are being made by the employers. This has increased the cost of human resources for employers. Until now, foreign nationals working in India and Indian nationals working outside the country were not required to contribute to any social security or pension scheme in India. The recent change is expected to encourage more countries to establish social security totalisation agreements with India. India has such agreements with Belgium, France, Switzerland, the Netherlands, Luxembourg, Hungary, Denmark, Czech Republic, the Republic of Korea, Norway and Germany. India and the U.S. have been discussing a totalisation agreement since 2006 but have not yet reached a consensus.
Under most SSAs that are in effect, individuals who have been sent to India to work for a period of up to 60 months are exempt from making contributions to the EPF Scheme provided they continue to make such contributions in their home country. Under the SSA with Germany, this period is 48 months with provisions to extend by another 12 months. The SSA with Switzerland provides for a 72-month exemption.
Under most operative SSAs with Indian workers who have been sent overseas to work for a period of up to 60 months are exempt from making social security contributions in India provided they continue to make such contributions in the home country. In the case of the SSA signed with Germany, this period is 48 months with a possible extension of 12 months, whereas with Switzerland, this period is 72 months. In addition, most of the operative SSAs provide that foreign nationals who make contributions to the social security system in the host country may get credit for these contributions on their return to their home country or on retirement. They may also qualify to obtain credit for the period of deployment toward their employment in the home country to help them qualify for social security benefits.
Withdrawing EPF Contributions
Before 2010, a foreign national who had made contributions to the EPF Scheme was eligible to make withdrawals at the age of 55 years, or at the time of termination of service or upon leaving India permanently. However, after the 2010 amendments, a foreign national may withdraw his or her contributions to the EPF Scheme only: (1) On retirement from employment at any time after the age of 58 years; (2) On retirement on account of permanent and total incapacity to work due to bodily or mental infirmity; or (3) If afflicted with tuberculosis, leprosy, or cancer. Another important issue to bear in mind is all payouts from the EPF Scheme may only be credited to a bank account maintained in India.
This is a major challenge as, from April 2011, EPF accounts become inoperative after 36 months if no request for withdrawal or transfer of funds has been made from the date the amounts become payable. Some SSAs mitigate a few of these problems and India expects to sign more SSAs in the near future. As this happens, the cost of employing foreign nationals in India is expected to decrease.
Disclaimer – The contents of this publication are not a comprehensive consideration of the subjects discussed and are designed to provide preliminary, general information. Readers should not conclusively rely on the information as legal advice and should seek independent counsel before any action is taken with respect to these or other specific issues.