How PF works: Different rules for Indian and foreign workers

EPFO clubs most allowances paid to expatriates with basic salary for calculating PF contribution

For foreign nationals working in India, contribution to provident fund (PF) can be tricky. The Employees' Provident Fund Organisation (EPFO) has offered clarifications on many aspects of PF contribution, but there are still a few aspects that are left to interpretation, which can possibly lead to disputes.

One such aspect is the salary that an employer should consider for PF deduction. According to the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (the EPF Act), an employee needs to contribute his share based on the basic wage, dearness allowance, retainership allowance and cash value of food concessions. Employers, therefore, do not include house rent allowance, overtime allowance, bonus, commission and any other similar allowance while calculating PF contributions.

EPFO had in the past issued an internal instruction stating that for exclusion from PF, “other similar allowance” should be in the nature of commission only. These instructions also specified that all allowances should be treated as part of basic wage – except for the specified exclusions. But subsequently, these guidelines were kept in abeyance and were not implemented. In the case of foreign nationals working in India, however, the authorities are sticking to these norms.

There are, however, various judicial pronouncements, though not in the case of international workers, under which any allowance paid ordinarily, necessarily and uniformly to employees may be included from basic wages. Litigation on this issue, therefore, cannot be ruled out.

PF hurdles for foreigners is reciprocal: Before taking up an international assignment, most individuals pay attention to the tax laws of the country when calculating costs. They tend to overlook the social security regime in the host country, which is equally important. 

The social security regime in India is governed by the EPF Act. In 2008, the government of India made social security scheme mandatory for cross-border workers by introducing the concept of International Workers (IW). Before this amendment, such workers qualified for exclusion from the EPF Act as their monthly salary exceeded the threshold limit prescribed therein. The amendments were reciprocal as the government realised that Indian employees were contributing large sums towards social security in overseas jurisdictions and could not avail the benefit on returning to India.

According to the definition of IW, it is a foreign employee who holds a non-Indian passport and works for an establishment in India that is covered by the EPF. It also includes an Indian employee who goes to work in a country with which India has a Social Security Agreement (SSA) and who is eligible to avail the benefits under the social security program of that country by virtue of contribution. Recently, EPFO has clarified that an Indian employee will not have the status of an IW after he has returned to India for work.

Cracking the whip: For IWs working in India, both the employer and the employee are required to contribute 12 per cent of their salary towards PF. A percentage of the employer’s contribution (that is 8.33 per cent) goes towards pension. Those coming to work after September 1, 2014 don't need to contribute towards pension if their monthly salary exceeds Rs 15,000.

The law has been evolving over the past few years. EPFO has ensured timely dissemination of information by way of FAQs, clarifications, etc. to ensure compliance. It has also been forthcoming in accepting representations from industry, HR forums and other stakeholders to help ease technical and process related challenges in respect of IWs. In spite of this, cases of inadequate deposit of PF have been discovered by EPFO during inspections. These are on account of interpretation of salary for PF, split payroll arrangements, and so on. Companies commonly split the salary of their mobile workforce. The PF law requires the full salary (paid in India and outside) to be considered for calculating PF contributions. 

EPFO has been taking strict measures against defaulters in order to regularise PF contributions. To recover outstanding PF dues, it has launched special recovery drives from time to time. If a company is found to be non-compliant with PF deposits, it will not only have to pay the outstanding dues but will also have to incur costs such as interest, penalty and damages (5-25 per cent), depending on the reason and span of delay.

Relief only for some: EPFO has also been gathering more information on the salaries that IWs receive. PF officers collect this data during annual inspections. There is also regular exchange of information between the tax and the immigration authorities – the Foreigner’s Regional Registration Office. 

International workers need to quote on their e-visa application form the PF registration number of the Indian company with which they are scheduled to work. The new PF forms – electronic challan cum return (ECRs) – have also included an optional field for reporting gross wages. Hence, corporates need to be cautious and ensure that they make contributions on the correct salary to avoid interest charges and penalties in the future.  

SSA not only provides relief from dual contribution but also offers the benefit of withdrawal of accumulated PF balance. According to the prevailing law, IWs can withdraw PF balance on attaining the age of 58 years. However, IWs from countries with which India has an SSA enjoy the privilege of being allowed to withdraw their PF balance at the end of their Indian assignment.

To ease the process of PF withdrawal for IWs from SSA countries, EPFO has begun accepting withdrawal applications in the month in which IWs plan to leave India, which is a welcome move. Recently, EPFO also issued an internal instruction to process PF withdrawals for IWs from Japan, who went before the India-Japan SSA became effective – October 1, 2016. Despite this, withdrawal applications have been rejected by certain PF offices in case of IWs who left India before their respective SSA came into effect. 

Employers don’t need to contribute to pension in case of IWs who have become members after September 1, 2014. In some cases, however, PF withdrawal applications have been rejected by certain PF offices on the ground that contribution to the pension fund was not made. Clarification from EPFO on these matters will help ease the hardship faced by companies and IWs.

Close watch to continue: The PF laws concerning IWs are continually evolving. Companies with globally mobile employees should be aware of the provisions related to IWs and ensure compliance with the PF law.  

The above-mentioned examples indicate that the authorities are now keeping a close watch. In view of the repercussions of non-compliance, foreign workers need to pay equal attention to the prevailing social security laws when choosing a country for work. 

Baweja is a partner at Deloitte Haskins and Sells. Senior manager Divya Agarwal and manager Tarun Garg also contributed to the article