Rule on inoperative PF accounts hurts international workers most

The concept of international workers (IWs) was first introduced by Union ministry of labour and employment in October 2008. The Government of India then made it mandatory for IWs to contribute to Indian social security scheme from November 1, 2008 or first date of assignment in India, whichever is later.

The term international workers was defined to include Indian workers or foreign nationals. It covers Indian employees having worked or going to work in a foreign country with which India has entered into social security agreement (SSA). IWs are eligible to avail benefits under a social security programme of that country, and expatriate employees working for an establishment in India to which the Employee’s Provident Fund and Miscellaneous Provisions Act, 1952 applies.

The scheme has severely impacted the human resource budgets of multinational companies having mobile employees. IWs were required to contribute 12% of their monthly pay to the Provident Fund (PF) along with a matching contribution by their employers. The employer’s contribution was further bifurcated as 8.33% of the salary towards pension fund (maximum cap on salary being Rs6,500 per month) and the remaining amount towards PF.

The initial scheme provided for withdrawal of accumulated balance from the PF account at the time of leaving India for permanent settlement abroad. Withdrawal from EPS (Employee’s Pension Scheme) was also permitted as per the provisions of SSA where employees were coming from a SSA country.

The benefit of reciprocity was also extended at the time of withdrawal from EPS to IWs if his/her home country provided for withdrawal of social security contribution to Indian working in that country even without SSA.

The GOI, however, made the above rules more stringent in September, 2010 by amending some provisions including the rule relating to withdrawal by IWs. As per these amendments, the withdrawal of accumulated balance standing to the credit of IW account is now permissible only at the time of his/her retirement from service in the establishment at any time after 58 years of age.

Further, the IW would require a bank account in India to receive the withdrawal from the PF account at a later date. This would cause practical difficulties to the IWs who would have already left India before becoming eligible to withdraw.

The government has also removed the salary cap of ¤6,500 with respect to employer’s contribution to pension fund at 8.33% of salary. This requires substantial amounts towards the pension account and creates a loss to those IWs who are from non-SSA countries, as they will not get their pension contributions and interest thereon back.

The government has also removed the benefit of reciprocity in India to IWs where the domestic laws of their home country provide for exemption towards contributions to social security for Indian nationals working there.

Though relief is available to ‘excluded employees’, enjoying the status of detached worker in terms of SSA between India and other countries, but only three such SSAs (entered with Belgium, Germany and Switzerland) have so far been made operational till date. These excluded employees are not required to participate in the PF scheme in India. However, IWs from countries other than these three countries will have to wait for many more years to claim their rightful dues.

Recently, the government announced that inoperative PF accounts will no longer earn interest effective from April 1, 2011. Though, the said amendment is not discriminatory to IWs (as the same applies to PF accounts held by local Indians also) but would have considerable impact on IWs who will not only find it extremely challenging to reclaim money blocked in PF account on retirement but at the same time being denied the benefit of earning interest on the money remained therein.

The objective of government of India is to provide better social security arrangements to its citizens working abroad and to ensure parity of its citizens in other countries with regard to participation in social security schemes. However, considering the practical difficulties and hardships faced by IWs, one may expect the government to come out with more clarifications.

Govardhan Purohit is executive director and Rupali Talwar is senior manager- tax & regulatory services, PwC India