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Mandatory Pension Fund Contributions in India for International Workers

Government pension fund contributions are a common requirement in many countries, and India has a social security fund for employees of both domestic and foreign employers. Every business establishment in India that employs more than 20 workers must register with the national Social Security system, and make mandatory contributions toward retirement and insurance benefits.

The requirements apply to both the Employee Provident Fund (EPF) and Employee Pension Scheme (EPS), for both contributions and withdrawals. Multinational companies with expat employees in India need to be aware of the social security contribution requirements, and how they will be enforced following two rule changes in the past eight years.

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In 2008, the social security registration and contribution requirements were also extended to international workers (IW) in India, whether employed by a foreign company or a business domiciled in India. Previously, IWs had been completely exempt from the social security regulations and related contributions.

In 2010, an additional change was made governing the rules for withdrawal of contributions by IWs upon departure from the country, impacting the conditions for accessing accrued benefits. These recent measures have financial and administrative consequences for foreign businesses and their employees that must be understood prior to initiating an assignment.

What are the Pension Fund Contributions for International Workers in India?

IWs are required to contribute 12% of their salaries to the Employee Provident Fund – without any cap or exemption based on salary amount. The employer must contribute an equal 12% amount as their share (allocated between the EPF and EPS), underscoring how this benefit requirement has a significant financial impact on businesses that hire or assign IWs in India.

Some of the fundamental points to understand about the registration and contributions requirements for IWs include:

  • The employee and employer contributions are based on total salary; regardless of whether it is paid in India or another country, paid via a split payroll or is derived from sources outside India.
  • Total salary includes all regular and holiday pay, food allowances and any retaining allowance, but excludes housing allowances, overtime, bonuses and commissions.
  • Registration and contributions for IWs are required from the first day of employment in India with a foreign or domestic company.
  • Only IWs working under an employment visa are subject to the regulations, and contractual work or short-term business travel is exempt. (This has led to a more strict evaluation of what type of work requires an employment visa to prevent avoiding the contribution mandate)
  • IWs can claim a deduction from income taxes in India for contributions of up to INR 150,000 per year.

What are the Available Exemptions From the Contribution Requirements?

While the new rules are broadly applied to IWs, there are certain exemptions available where India has a reciprocal Social Security Agreement (SSA) or economic bi-lateral treaty with the IW’s home country.

  1. Social Security Agreement exemptions are granted when:
  • The IW contributes to their home country social security system, or;
  • The IW has ‘detached worker’ status as specified in the SSA, which excludes them from the requirements
  1. Economic agreement exemptions are granted when:
  • The IW either contributes to the home country system, or;
  • Participation in India’s social security system is specifically exempted by the economic agreement

Despite these exemptions, only a few countries have entered into an SSA with India. This limits the availability of exemptions for IWs, including those from the UK and US, who have yet to ratify an SSA with India.

Pension Fund Withdrawal and Distribution Rules When an IW Leaves India

The rules for pension registration and contribution in India are not unusual compared to many countries, however the 2010 change in withdrawal rules can be burdensome for some IWs and their employers. The requirements differ for both the EPF and EPS as follows:

EPF Withdrawal Rules

IWs may withdraw EPF balances if they meet one of these conditions:

  • Retirement after age 58
  • An SSA with the home country allows withdrawal after employment in India ends
  • The IW has a serious illness
  • Retirement due to permanent and total mental or physical incapacity

Note: All withdrawals from the EPF must be made to an Indian bank account, and some banks will set up accounts for this sole purpose.

EPS Withdrawal Rules

The EPS rules are more stringent and in general, where there is no applicable SSA in force with the home country, IWs are not entitled to pension benefits when they leave India, regardless of accrued employer contributions. (Employee contributions are only allocated to the EPF, so no employee contributions are lost)

The exception to this rule is where an IW has been employed for a period of 10 years or more. Also, if there is an applicable SSA, the IW will probably be entitled to a totalization benefit in the home country.

Consequences and Penalties for Non-compliance with Pension Fund Requirements

As with all employment and labor laws, compliance with the pension fund requirements is mandatory for foreign businesses. Employers are legally obligated to deduct and remit contributions via the Form IW-1 (for IWs) on a monthly basis, and failure to comply will result in a range of payments and penalties for the employer. The severity of the penalties illustrates the serious approach taken by Indian authorities toward compliance for all businesses.

Interest on unmet payment obligations

If an employer does not make the required contribution, they are liable for the past due payments plus 12% interest per annum accrued from the original payment due date.

Damages

Fund authorities can recover damages from the business depending on the period of non-payment on any employer in default of contributions. Damages are levied at a rate of 5% to 25% on the amount owed.

Additional consequences

In addition to damages, the employer or other involved parties (such as a local branch or partner) may face criminal prosecution for non-compliance. Convictions can result in fines and imprisonment up to one year. This type of criminal penalty may seem unwarranted for unmet pension contributions, but if a company is aware of the requirements and intentionally attempts to avoid payment, that behavior could be seen as fraudulent.

Summary

Every country has some requirement for social security payments on behalf of in-country employees, both local and foreign nationals. India’s social security system places a combined 24% contribution obligation on employers and employees. This now extends to international workers on assignment in the country. In addition, withdrawal of contributions may be difficult for many IWs without an SSA between India and their home country.

While some employers may attempt to avoid the financial and administrative burden associated with pension fund contributions, they should be aware that there is a host of penalties and consequences for non-payment, or other actions that misrepresent employee status and activity while in India. Most of these issues can be avoided through the use of a GEO solution, such as Shield GEO, who can act as a local employer of record and ensure compliance with all Indian pension fund contribution requirements on behalf of a foreign business.

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The information in this article is subject to changes in local legislation.

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