The Employee Provident Fund (PF) is a scheme similar to social security arrangements in other countries. For Indian citizens, the company deducts 12% from Basic Salary (this is not the same as Gross Salary) and contributes a further 12% up to a maximum amount. The Provident Fund provides a tax free, compound interest savings scheme and ensures that employees at least have something saved for retirement.
Technically, Indian citizens are not allowed to withdraw the Provident Fund until the age of 58, however in reality, most people withdraw it when they switch companies.
For the foreigner working in India, the Provident Fund presents a big problem. First, 12% is deducted from the Basic Salary as the employees contribution, secondly, the employer must also contribute a full 12% with no maximum limit. This additional cost most be factored in to the Cost To Company (CTC) which is the favoured method used to calculate salary in India. Hence, after PF deductions, the money in your bank is likely to be less than expected.
Furthermore, in the past, foreign workers were able to withdraw their PF contribution after leaving their place of work. The Indian Government, for their own reasons, decided to amend this rule and made it a requirement that foreign workers could only withdraw their PF contributions after the age of 58.
To compound the problem, after 3 years of no deposits, the PF account becomes inactive and receives no more interest. Given the rate of inflation in India and the fact that many people would be waiting 20-30 years to withdraw, if someone does decide to withdraw at 58, the amount they get back probably won’t cover the cost of the airfare ticket.
Part of the reason for this introduction is that when Indian workers are employed in countries like the US and UK, they are required to contribute to the social security scheme in place. Despite these contributions, the Indian employee has no way to withdraw their contribution. The Indian Government is looking to create Social Security Agreements (SSA) between countries which allows the Indian worker to transfer their social security contribution back to India.
Currently there are only a handful of European countries that have an SSA with India. Foreign workers from these countries are able to withdraw their PF after finishing their work.
At the time of writing, it is extremely unlikely that an SSA between India and the US, and India and the UK will ever be made. Therefore citizens of these countries will have to wait until they reach 58 before being allowed to withdraw their PF. In effect, it is almost like an additional tax for foreign workers to bear.
The measures implemented by the Indian Government have caused frustrations for many companies looking to send their employees to work in India. US, UK, Korean and Japanese workers are particularly affected.
In order to ensure that the rules are being followed, the FRRO is demanding evidence that the company is paying the required amount of PF for the foreign worker. In some cases, FRRO officers are even requesting letters from the PF office confirming the amount paid is correct. This is a problem given the slow speed of Indian bureaucracy.
At the time of writing, no mention is made on the Government of India’s immigration website regarding the rules surrounding foreign workers and the Provident Fund.