One of the key aspects that merits attention is the impact on the social security related obligations of the outbound employee in his home country (India) and the host country to ensure that the individual’s social security benefits are not impacted due to an overseas stint.
Social security framework
The social security framework in India mainly caters to the organized sector, i.e. where the workers have a direct and regular employer-employee relationship with an organization. The Employee Provident Fund and Miscellaneous Provisions Act, 1952 (EPF Act) is the main legislation which governs the provident fund, pension and deposit linked insurance schemes under its framework. The EPF Act is applicable to every organization which employs 20 or more employees and follows a contributory scheme where the employer and employee are required to make matching contribution at a specified percentage of the salary. The accumulated balance in the employee provident fund (EPF) account is portable and is transferred to the next employer. Over the years, the contributions have earned an interest of over 8% and are exempt from tax subject to certain conditions.
The accumulated balance in the EPF account can be withdrawn in three situations: (i) at the time of retirement, i.e. on or after 58 years of age, (ii) if unemployed for two months or more and (iii) in case of death before specified retirement age. A partial withdrawal is allowed for certain purposes like repayment of home loan; for purchase, construction or renovation of house; meeting wedding expenses; for medical purposes.
Therefore, it is important to understand the impact on the existing balance in the EPF account in case of an employee who moves overseas on arrangements such as deputation, secondment, short-term/ long-term assignments or on transfer or in case of a new employment altogether.
A common issue that revolves around outbound movement and social security contributions is place of payroll, i.e. implications on social security contributions when payroll is continued in the home country versus when the payroll is transferred to a host country. The same has been discussed in subsequent paragraphs.
Payroll continued in India
In cases where an employee is sent to a group company outside India on arrangements such as deputation, secondment or a short-term assignment, the employer-employee relationship with the Indian employer typically remains intact. In a scenario where an outbound employee continues to receive salary in home country (India), then he/she would be under an obligation to continue the social security contributions in India. However, in such cases the employees may also be required to start contributing to the social security schemes in the host country resulting in dual contribution.
In order to mitigate dual contributions, the Indian government has entered into bilateral social security agreements (SSA) with 18 countries which includes Australia, Canada, Japan, Korea and some of the key European countries like Germany, France, Denmark, the Netherlands, Switzerland, etc. Employees being seconded or deputed to any of the countries with which India has an SSA, can obtain a certificate of coverage (CoC) from the EPF authorities based on which they will be exempted from social security contributions/taxes in the host countries.
Employees being sent to countries with which India does not have an SSA may need to contribute to both Indian and the host country’s social security schemes.
Payroll transfer to host nations
The EPF authorities have clarified that payment of salary in India is a necessary element for determining the liability towards social security contribution in India and obtaining a CoC. If salary is not payable by an Indian establishment, the outbound employee will not be considered as an ‘employee’ as per the definition given in the EPF Act. Accordingly, in case of transfer of payroll, say to the employer’s group company in the host country, the social security contribution in India would be discontinued. Similarly, in case where an individual moves overseas for a new employment opportunity, the social security obligations cease to exist in India.
In such a case, the outbound employee may either withdraw the accumulated amount after two months of cessation of employment in India or let the corpus stay invested. The implications under both the options are summarized below:
•Withdrawal of accumulated balance
(a) Employee has rendered less than 5 years of continuous service in India
Out of the total accumulated amount, the employer’s contribution and the interest thereon would be fully taxable as salary income. The employee’s contribution would be taxable to the extent of deduction, if any, claimed in earlier years. The interest earned on employee’s contributions would be taxable as income from other sources in the hands of the employee. The EPF authorities pay out the accumulated amount after tax withholding at a flat rate of 10% and the employee is required to ascertain and deposit any balance tax.
(b) Employee has rendered more than 5 years of continuous service in India
The entire accumulated balance comprising of employee’s contribution, employer’s contribution and interest thereon shall be exempt from tax in India as per the prevailing tax laws.
•Allow the accumulated balance to stay invested
Employees who leave India on cessation of their Indian employment contract can continue to leave the corpus invested. In such a case, interest would be credited annually on the accumulated balance till the time the corpus is maintained with the authorities. It is important to note that the balance standing as on the date of exit from an organization will be fully tax-exempt if the employee had rendered more than five years of continuous service. However, as per a recent tax tribunal decision, any interest credited after leaving the Indian employer is taxable in the year of withdrawal. In case the employment period was less than five years, part of the corpus would be taxable as discussed under the ‘withdrawal’ option above.
1.What is the process for withdrawal of the EPF amount?
Withdrawal can be made online (bit.ly/2HHzt98) or by filing the withdrawal form through the Indian employer. In case of the online method, it is important that the individual has an Aadhaar number in India and a Universal Account Number (UAN) provided by the employer. Alternatively, an individual may also submit the prescribed forms with the employer, a cancelled cheque leaf of the bank account for reference, and any other document that may be required to substantiate the claim. The employer is then required to attest the form and send the documents to regional provident fund office for processing the withdrawal.
2.What is the salary on which provident fund contribution is calculated?
Employer and employee each contribute 12% of the monthly pay towards provident fund. Monthly pay for this purpose comprises of the following components:
•Dearness allowance (all cash payments by whatever name called paid to an employee on account of a rise in the cost of living);
•Retaining allowance; and
•Cash value of any food concession
3.Would the monthly pay be proportionately reduced in case an individual has multiple country responsibilities and spends part of his time outside India?
Provident fund contribution is calculated on the total salary payable on account of his/her employment by a covered establishment in India. This is applicable even for the responsibilities handled outside India.
Akhil Chandna and Ajay Arora contributed to this article.
Vikas Vasal is national leader tax–Grant Thornton India LLP. You can send your queries to firstname.lastname@example.org.