Provident Fund Act and Foreign Nationals working in India

Provident Fund Act and Foreign Nationals working in India

Provident Fund Act:

Are you a Foreign National who worked in India post-2008? You may have large sums lying in your India Provident Fund Account.

Background on Provident Fund regulations

Employees’ Provident Fund Act is one of the important labour legislation in India which provides for retiral benefit in the case of non-government employees. The applicability of this Act is mandatory in case of an entity having 20 or more employees at any time during the year. Both employer and employee need to contribute 12% of salary each to this fund. A portion of the employee contribution may go to the pension funds depending on the date of joining, wage level, and age of the employee. Salary for this purpose excludes House Rent Allowance, Overtime Allowance, Bonus, Commission, and similar allowances, perquisites, and gifts by the employer. In the case of an employee whose, Provident Fund (PF) wages exceed INR 15,000 has the option to restrict the contribution to 12% of INR 15,000 or can opt-out of the contributions subject to conditions. The employer would make a matching contribution.

Applicability to Foreign Nationals

Indian Provident Fund laws were amended to make the contributions mandatory in the case of foreign nationals effective 01 Nov 2008 with very few exceptions. Accordingly, an International Worker (IW) working for a covered establishment in India would need to make a compulsory contribution to this fund irrespective of their wage level. This means that even if the salary exceeds INR 15,000 it is mandatory for him to contribute to this fund. An IW is defined as a foreign national working for an establishment in India to which the Provident Fund (PF) Act applies.

So, in the case of foreign nationals, 24% of salary (12% employer and 12% employee) would be contributed to the fund without any cap which could be a sizeable amount. As an illustration, if the monthly salary is INR 500,000 approximately INR 120,000 per month will be contributed to this fund. Further, the fund would fetch a very good interest (8.5% for FY 2019-20) as well. However, there could be a slight variation in the interest rates year on year.

Exceptions

If any of the following applies to an IW, it is not mandatory for him to contribute to the Provident Fund in India.

·         IWs working for an establishment to which the PF Act does not apply, basically an entity having less than 20 employees

·         IWs from social security agreement (SSA) countries contributing to their home country social security

·         Singapore Nationals / Permanent Residents eligible for exemption under the Comprehensive Economic Agreement

Social Security Agreements are bilateral agreements entered by the Indian government to avoid double social security contributions. Currently, India has effective SSAs with 18 countries and the list of such countries and effective dates are provided in the annexure below. If a foreign national has worked in India prior to the effective date of the SSA, there could have been contributions to the PF fund in India.  As you observe, India still does not have a social security agreement with the US and UK.

Withdrawals of Provident Fund

So, what happens to this fund? Can a foreign national withdraw the amount lying in the PF account?    

Definitely ‘Yes’. However, there are certain conditions attached to this. Let us understand what these conditions are.

·         Foreign nationals from an SSA country can withdraw the amount lying in his Provident Fund account at or after repatriation from India. May also be eligible for a monthly pension after retirement as per the SSA. The amount could be credited to the foreign bank account if there is no bank account in India.

·         Foreign nationals from non-SSA countries can withdraw the PF accumulations on attaining the age of 58 years or at the time of repatriation whichever is later. May be eligible for a pension if he has contributed for a period of 10 years. The amount will be credited to the Indian bank account only.

Further, if the contributory period is less than 5 years, the withdrawals may be taxable in India as per Indian tax laws subject to relief under the Double Taxation Avoidance Agreement. Further, the interest accumulations post repatriation may be taxable even if the contributory period is more than 5 years. However, the treaty relief could be explored here as well.

Annexure – Social Security Agreements with India

Table showing list of countries with SSA and effective dates

The write-up is for general understanding. We suggest the readers discuss with their consultants before deciding on their eligibility for withdrawal and related Tax Implications.

AUTHOR:

A S Amarnatha B.com, FCA, LLB
Amar is a practicing Chartered Accountant specializing in the field of NRI and expat taxation. His expertise includes various facets of global mobility like expatriate tax, DTAA, social security, ESOPs etc. He is also specialized in US individual taxation both from expat and foreign national tax compliances perspectives. He can be contacted at amaranathambati@gmail.com
 

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