Preserving your PF during an overseas assignment

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The Hindu Business Line


Alok Agrawal
Director — Tax and Regulatory Services

Over the last few years, the Indian Government has signed ‘social security agreements' with governments in other countries for the benefit of Indians working abroad and their Indian employers.

Besides helping Indian and foreign employees get reciprocal social security benefits, the Government hopes these agreements can make Indian companies more competitive by getting exemption from social security contributions in the host countries and thereby reducing costs. However, there have been many ambiguities in the implementation of these SSAs.

After signing an SSA with Belgium in November 2006, the Indian Government continued to sign more with other countries. The Ministry of Labour and Employment extended the provisions of the PF law with effect from November 2008 to a new class of employees called ‘International Workers'; the term was defined to include an Indian employee having worked or going to work in a country with which India has an SSA and is eligible for benefits under a social security programme of that country.

Once the SSA with Belgium came into force in September 2009, the Employees' Provident Fund Organisation, the body implementing the SSAs in India, issued guidelines and prescribed the format for the ‘certificate of coverage' for Indian employees leaving on overseas assignments

In September 2010, the Ministry made further amendments to the International Worker regulations, which had the following significant implications:

Barring certain exceptions, an ‘International Worker' was allowed to withdraw the PF balance only upon attaining the age of 58 or on the grounds specified in the SSA. This amendment made the withdrawal much more restrictive as compared to a regular Indian employee, who would be eligible to withdraw the accumulated PF balance according to various avenues available.

In the case of regular Indian employees, contribution to the pension scheme out of the employer's total contribution is 8.33 per cent of the monthly pay subject to a limit of Rs 6,500. Therefore, only Rs 541 per month gets allocated to the pension scheme and the remainder (which represents the majority of the employer's contribution) gets allocated to PF. However, in the case of ‘International Workers', due to the removal of such limit, 8.33 per cent of the entire pay gets allocated to the pension scheme, resulting in relatively lower PF contributions and smaller PF accumulation.

Through an instruction issued in August 2011, the EPFO had indicated that “Indian nationals are to be treated as International Workers with effect from the date of commencement of Certificates of Coverage issued by the EPFO, Head Office. The member will continue to be an International Worker till the final settlement is made in accordance with provisions of the scheme”. In other words, this meant “once an IW, always an IW”.

The above instruction raised concerns about its impact on Indian employees who have completed their international assignments and returned to India. Such employees, for example, would have higher pension contributions and lower PF contributions for the rest of their career merely due to one overseas assignment to a country with which India had an SSA. In order to avoid the restrictions attached to a lifelong IW status, many Indian employees were disinclined to take up such international assignments. This, in turn, meant several business challenges for Indian companies, with the potential to defeat one of the stated objectives of the SSAs.

Based on representations from industry and others, the EPFO has revised its position. According to the revised FAQs issued on May 25, the EPFO has clarified that merely holding the CoC does not make an employee an ‘International Worker', because an employee becomes an ‘International Worker' only after s/he becomes eligible for the benefits under the social security programme of any country. It has clarified that after obtaining a CoC, the employee is only exempted from contributing to the social security systems of the foreign country with which India has SSA; hence, s/he is not eligible for the benefits under the social security programme of that country.

While other issues remain, this clarification provides a welcome relief to numerous Indian employees travelling to countries with which India has SSAs, as well as their employers, as they need not comply with the more onerous provisions under the PF law applicable to ‘International Workers'. This development reinforces the hope that India's SSAs will benefit Indian employees and their employers in the long term.

The ‘International Worker' tag, and its implications on PF, do not apply to all those who travel abroad on an assignment.