r2i forum

Posted: **Wed Nov 24, 2010 11:57 pm**

India tightens provident fund withdrawal rules for international assignees

Overview

The Ministry of Labour and Employment (the Ministry) amended the Provident Funds Scheme in October 2008 to extend its applicability to ?International Workers?(IWs). The provisions related to withdrawals from the Provident Fund (PF) were hitherto the same as that applicable to domestic employees. IWs were therefore entitled to withdraw the balance available at their credit in the PF account immediately upon completion of assignment in India. The Ministry has now amended the scheme to allow PF withdrawals only upon attainment of 58 years and has also modified the pension rules.

Key amendments to the Provident Fund Scheme

The remuneration paid in foreign currency will be converted into Indian rupees by applying the telegraphic transfer buying rate of State Bank of India as on the last working date of the relevant month.

Withdrawals are permitted only under the following circumstances:

- On retirement from service after attainment of 58 years.
- On retirement on account of permanent and total incapacity for work due to bodily or mental infirmity as certified by specified medical practitioner.
- Upon satisfying the conditions specified in the Social Security agreement (SSA) entered into between the Government of India and the other country in respect of a member covered under such agreement.

Mode of Payment of Provident Fund

Amounts payable to a member covered under an SSA entered into between the Government of India and the other country shall be as per terms specified in the agreement.

Changes in the Pension Fund Scheme

Under the existing provisions of the Scheme, a part of the employer contributions i.e 8.33% of the Pay (for this purpose Pay is limited to ` 6500p.m) is remitted to the Pension Fund and the Central Government makes additional contribution @ 1.16% on ` 6500. Under the new amendment, there will not be any contribution by the Central Government to the account of IWs. Members from countries with whom India does not have an SSA were entitled to withdrawal of pensions based on the principle of reciprocity as available to Indian employees in such country. This provision has now been withdrawn, thereby restricting the availability of benefits under EPS to members only from SSA countries.

These amendments are effective from 7 September 2010, the date of publication of the notification in the official gazette.

Comments from Deloitte

IWs from countries not covered by an SSA will now be eligible to withdraw accumulated balances in PF fund only on attainment of 58 years of age or on medical grounds as prescribed. Hitherto, these amounts were withdrawable on repatriation.

Further, the IWs are required to either retain the existing bank accounts in India or open a fresh bank account for the purposes of withdrawal which could pose practical challenges..

The Government had decided to stop interest payments on non-operative PF accounts (which is currently at 9.5%) in India. We need to wait and see whether the accumulated balance of IWs who have repatriated out of India will be entitled to interest after repatriation until the date of payment.

In summary, this amendment will inflate the cost structure of Indian assignment of IWs and the employers will have to factor this additional cost in their financial budget.

Source: Notification No F.No.R-11011/1/2007-SS-II(Vol-II) dated 3 September 2010

Posted: **Thu Nov 25, 2010 12:04 am**

This regulation change affects all foreign citizens working in Indian companies effective immediately.

High income earners who dream to retire early in India and plan to withdraw the PF funds have to fore go their dreams. Many IT employees pay more than 1L for PF and they receive equivalent company contribution. With 10-15 years of working this money grows quickly into several lakhs. By locking this money until age 58, GOI has affected plans of several foreign citizens living and working in India.

GoI has not given any time for these employees to plan or restructure their pay.

If you are foreign citizen and was not informed by your company or not aware of this ruling, please contact your HR and talk to them and find out how this affects your future plans and see how you can restructure your pay to reduce the impact going forward.

Some companies may be flexible enough to reduce the basic and give you more allowances. Basic pay directly affects the PF contribution.

Posted: **Tue Dec 14, 2010 7:15 pm**

I have been notified about this new regulation and amendment by my employer. Prior to this 12% of basic pay is contributed towards PF account and similar amount is matched by the employer.

With this regulation my HR also indicated the contribution amount is calculated using the total salary (not just basic pay but other allowances such as Special allowance, medical allowances etc.,). The only excluded items are Bonus and HRA. That means 12% of your total salary is contributed to EPF. With this about 24% of the monthly salary (excl HRA) is forced to be saved in EPF including employer match, which seems to be lot of amount to fund your retirement.

This seems to be applicable only to International workers where as for others it is 12% of basic pay is contributed to EPF.

I have the following questions related to this amendment:

1) Contribution amount calculation seems to be different for International workers. Is this correct interpretation and would like to hear how your employers are addressing this?

2) OCI status will be treated differently for the definition of IW?

Please let me know any thoughts/suggestions.

Posted: **Tue Dec 14, 2010 10:34 pm**

#2
I have couple of questions:

Where does the increased PF contribution come from ?
Say for example, if you receive

Basic = 4L
Bonus and HRA = 2L
Other pay ( allowances) =6L
Total pay = 12L

Earlier company used to take only 4L x 12% from you pay and contribute 12% from employer side, make it total of 48K+48K = 96K.

With this new regulation, company has to take 10L x 12% =120K from your pay check and contribute 12% from their side, make it total of 240K. So, there is an increase of 144K going to EPF which you can't touch until you turn 58. Is this 144K comes out of your total CTC ? Or Is company taking some burden off from employee ? What does you HR say about this ?

Posted: **Wed Dec 15, 2010 9:09 pm**

#4 RRK

Your example calculations are perfect.

The additional 144K contribution is coming from the total CTC (by reducing another allowance by an equal amount and keeping the total CTC same as previous). The justification from HR is that this additional money is going to the EFP fund which employee can withdraw later point of time whenever they are eligible.

Posted: **Sat Dec 18, 2010 8:20 pm**

IndiaChit;355895#4 RRK

Your example calculations are perfect.

The additional 144K contribution is coming from the total CTC (by reducing another allowance by an equal amount and keeping the total CTC same as previous). The justification from HR is that this additional money is going to the EFP fund which employee can withdraw later point of time whenever they are eligible.

There are two problems with this approach.

(1) the employee is taking home less pay - affects his current life style very much. The cut is huge.

(2) more money is invested in conservative investments.

I hate these 8.5% schemes used for long term goals like retirement. It erodes your purchasing power slowly. Even though the future numbers look very big, adjusted for inflation, you can hardly buy the same life style in future with that money. Not many realize this and several investors think forced savings like this one is good for them.

In short this is a big hit for foreign workers in India.

Posted: **Sat Dec 18, 2010 9:10 pm**

RRK;356649There are two problems with this approach.

(1) the employee is taking home less pay - affects his current life style very much. The cut is huge.

(2) more money is invested in conservative investments.

I hate these 8.5% schemes used for long term goals like retirement. It erodes your purchasing power slowly. Even though the future numbers look very big, adjusted for inflation, you can hardly buy the same life style in future with that money. Not many realize this and several investors think forced savings like this one is good for them.

In short this is a big hit for foreign workers in India.

RRK - Thanks. I agree and it is a big hit. Is this correct to interpret all salary to be considered for Contribution amount calculation as against using the basic pay alone?

I went thru the FAQ's of EPFIndia website and somehow I felt the contribution amount calculation should be same irrespective of foriegn workers or Indian workers. It is not clear the basic alone to be considered but both have the same line items for calculating the PF contrib amount.