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September 23, 2008
Expatriate
Employees To Be Socially Secured In India?
The Government of India has proposed to issue a notification
whereby expatriate employees in India will be required to park
24% of their salaries into the social security schemes
(including a pension scheme) managed by the Indian Employees
Provident Fund Organization (“EPFO”).
Background and proposed amendments:
Currently under the Employees’ Provident Fund and Miscellaneous
Provisions Act, 1952 (“EPF Act”) there is no
specific requirement for expatriate employees in India to
contribute to the EPFO towards provident fund / pension. Such
employees typically continue to remit their retirement savings
into their home country’s pension systems. This helps ensure
that there is no ‘break in service’ in their home country’s
pension system.
As per rule 69 of the Employees’ Pension Scheme Rules, 1995, an
employee can withdraw the amount accumulated in his provident
fund account immediately before migration from India for
permanent settlement abroad or for taking employment abroad.
This allows expatriates in India to withdraw the balance amount
in their provident fund account prior to leaving India. However,
Indian employees working in other countries may not be eligible
to a similar benefit. For example, it is believed that in the
US, an employee has to serve at least 10 years in the United
States to be eligible to withdraw his social security benefit.
If the foreign employee in the US leaves the US before
completing 10 years of service in the US, he may be forced to
forfeit the amount standing to the balance in his pension
account in the US.
In order to avoid this disadvantage to international employees
as well as the loss of contributions to the EPFO, India has been
attempting to enter into social security agreements (also known
as totalization agreements) with other countries including The
Netherlands, Germany, France, Czech Republic and the United
States. Such Agreements inter alia exempt international
employees from the mandatory requirements of making pension
contributions in the country of employment, provided they
continue to make similar contributions in their domicile
country. Recently, India and Belgium have signed such a
bilateral social security agreement which is proposed to be
effective from January 1, 2009.
Government sources have indicated that the EPF Act is proposed
to be amended to include a clause on contribution towards
provident fund by expatriate employees. Additionally,
expatriates would be subject to a similar treatment on
withdrawals from the provident fund account as would have been
given to Indian employees working in those countries abroad. The
notification when issued would throw more light on the exact
amendments that are likely to be introduced in the EPF Act.
Implications:
It is estimated that over 5 million foreign workers presently in
India enjoy exemption from pension contributions. On the other
hand, approximately 20 million Indians employed abroad may be
required to make pension contributions as per the local laws of
the countries where they may be employed. As a result of this,
Indian employees working abroad contribute marginally into the
EPFO schemes once they leave India, mainly because of the burden
of making such payments in the local jurisdiction as well.
This proposal by the government is likely to increase the fund
flow into the EPFO as not only Indian employees but also
expatriates in India will make pension contributions to the
EPFO.
Vikram Shroff, head of the firm’s international Human Resources
Law practice group, states that, “As India globalises, we
witness more movement of personnel across borders. Employers
want the ability to transfer their employees across nations
without creating any disadvantage to them on account of inter
alia employment benefits. Such developments are likely to
pressurize and bring about some urgency to several countries to
enter into totalisation agreements with India and going forward,
it would be interesting to see whether other countries like US,
UK, Australia, etc. enter into such agreements with India.”
The past several months have seen a few other proposals by the
EPFO including a proposal to extend the coverage of the EPF Act
to establishments with 10 or more employees and appointment of
some leading fund managers to manage the funds accumulated by
the EPFO. The government may also plan to introduce a new
pension fund scheme which would be voluntary for non-government
employees.
Source:
The Financial Express
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