Migrating from India? Be mindful of PF withdrawals
Published: Feb 08, 2017
Ms Saraswathi Kasturirangan is Partner and Ms Pallavi Dhamecha is Manager with Deloitte Haskins and Sells LLP
PROVIDENT Fund (PF) contributions in India enable employees to build an attractive retirement corpus, while enjoying tax benefits for employee contributions, tax exemptions for employer contributions and interest accruals. However, where the PF balance is withdrawn within 5 years of continuous employment, the amount withdrawn is subject to taxation.
Generally, employees who migrate from India prefer to retain their PF account in India even if it is eligible for withdrawal on account of multiple factors:
(a) Most of them are deputed for a limited duration, and they would prefer to continue their PF after their return
(b) As compared to other risk free investment options, the provident fund account provides a decent rate of return
(c) Withdrawal of PF in India could trigger a tax liability in India if their past contributory period was less than 5 years
(d) Withdrawal of PF balances could attract taxes in the overseas jurisdiction depending upon the residential status and tax rules of such overseas country.
However, employees may not be aware of the potential loss of interest to their PF accounts if the provisions of "Inoperative accounts" are triggered.
Inoperative accounts under the PF regulations
The concept of inoperative account was introduced effective 1 April 2011 whereby credit of interest to the PF accounts would cease where the accumulated balance was not withdrawn within 3 years from the date it becomes withdrawable. This was applicable in cases where
+ the member ceased to be employed
+ died while in service or
+ changed his employment
and no application for withdrawal or transfer, as the case may be, is made within 36 months from the date it became withdrawable / transferable.
Effective November 2016 there has been a relaxation in the above provisions. The criteria for treating an account as an inoperative account has been narrowed down. The interest credit would now be discontinued on PF accounts after a period of 36 months from cessation of employment
+ on retirement after attaining 55 years of age; or
+ on account of death; or
+ on migrating abroad permanently.
Accordingly termination of employment on account of resignation, temporary deputation to an overseas country would now not trigger the provisions of inoperative account.
What migrating employees need to be aware?
Employees who are deputed abroad for specified periods and intend to return back to India after such time are not required to be considered as migrating abroad permanently. Such employees should therefore not be covered under the provisions of inoperative account. Consequently, their PF account balance would continue to earn interest. This will help Indian outbounds to retain their social security corpus active, continue earning interest in India.
It may be noted that the phrase "migrated abroad permanently" is not defined under the PF Act. Hence, if an employee is going abroad for employment as a local hire or permanent move but with intention to return to India at some point in time, should such employees not be entitled to receive interest on their PF balances?
It is also important to understand the basis on which the PF authorities collate this information and categorize the accounts. Upon termination of employment, an employer files a Form 10 with the PF authorities. This is a monthly return reflecting the details of members leaving the services. The Form 10 specifically requests for information on "reason for leaving service" and provides an option to the employer to reflect the appropriate reason such as death, migrating abroad for permanently or retirement after attaining the age of 55 years, employment elsewhere etc. In light of the changes to the provisions relating to inoperative accounts, the employees in their best interest should ensure that employer chooses the right category of reason for leaving services so that provisions of inoperative account are not triggered. This would ensure that the account continues to earn interest.
This is one of the instances where employers need to be extra diligent in reporting the right information in Form 10 as it could have a significant impact on the employees. If this is not done right, the employees would tend to lose the benefit intended by narrowing down the scope of inoperative account.
