Provident fund contributions: A dilemma for international workers

The provident fund legislation defines an international worker as an employee who holds a foreign passport and is employed in India. However, citizens from countries with which India has entered into a social security agreement or a bilateral comprehensive economic agreement, allowing for exemptions under these agreements, are excluded. In October 2008, specific regulations were introduced for such employees within the provident fund legislation. This involved the addition of Paragraph 83 to the Employees’ Provident Funds Scheme, 1952 and Paragraph 43A to the Employees’ Pension Scheme of 1995.

Provident fund contributions for international workers are required to be made on the full monthly salary, although certain elements like house rent allowance are excluded. These workers are eligible to access their provident fund savings solely upon retirement, either after reaching the age of 58 or if they retire due to a permanent and total inability to work. Early access to the provident fund is granted exclusively to international workers who are protected by a social security agreement.

These regulations impose challenges for international workers because a portion of their income (specifically, 24% of their basic salary and the majority of allowances) is locked in their provident fund accounts held by the Employees’ Provident Fund Organization (EPFO) or employer-established private trusts. These contributions remain out of reach for international workers until they reach the age of 58. In light of these restrictions, a number of employers and employees have brought writ petitions to different high courts to contest the legality of these provisions under the provident fund scheme.

Key insights from court’s decision

On 25 April, the Karnataka high court delivered a ruling striking down the special provisions for international workers. The court deemed these provisions to be incompatible, arbitrary, unconstitutional and ultra vires, basis the following key principles:

1. The intent behind the provident fund legislation was to provide retirement benefits to employees with lower incomes, not to extend social security benefits to those who earn substantially higher salaries.

2. The introduction of special provisions for international workers via the notification of paragraph 83 in the provident fund scheme constitutes subordinate legislation under the provident fund law. Such provisions in the provident fund scheme must align with the original purpose of the provident fund law and cannot overstep it.

3. Article 14 of the Indian Constitution mandates ‘equality before the law’. Both foreign nationals working in India and Indian citizens should be treated as equals, and the provident fund law should be applied uniformly to all who are equal. In the current scenario, there is evident discrimination as the salary cap (of ₹15,000 per month) for mandatory provident fund coverage and contributions applies to Indian employees but are not enforced for international workers.

After this ruling, it is anticipated that the Employees’ Provident Fund Organisation (EPFO) or the central government may appeal to a higher bench of the high court or the Supreme Court of India. In the interim, organizations should continue to comply with the existing provisions for international workers while staying vigilant for any actions taken by the EPFO or for any new guidance or notifications that may be issued.

Potential implications of the court’s decision

If the courts ultimately confirm the decision, it could lead to significant outcomes for various stakeholders involved.

For international workers, the judgement could provide substantial relief—potentially eliminating the requirement for them to join the provident fund scheme. This would offer them the option to increase their take-home pay if employers include the equivalent amount as part of their fixed salary.

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Additionally, international workers who have previously made contributions to the provident fund but are currently unable to withdraw their funds due to the specific rules for international workers might gain the ability to retrieve their provident fund balances from the EPFO.

For employers, the ruling could lessen the compliance burden associated with the contributions and regulatory compliance for international workers, making it more convenient to employ foreign nationals.

Sonu Iyer and Puneet Gupta are tax partners at EY India.