Many Indians work abroad especially in developed countries such as the United States, United Kingdom, and Canada because of higher pay, higher standard of living, and better health care. Remittances sent by Indians abroad are one of the biggest contributors to the Indian economy.
Let's say you have everything ready, you have packed your bags, and are now ready to leave the country. Whether you are leaving India for good in search of a better job or you have been given an international assignment, you would have worked in India for a while and contributed to some form of government-backed savings scheme.
We will look at what to do with your Employee's Provident Fund (EPF) account and move on to the frequently asked questions on the EPF account by Non-resident Indians (NRIs).
Provident Fund (PF) or Employee's Provident Fund (EPF) is a government-backed retirement savings scheme where you and your employer contribute money over a long period so that it forms a considerable sum at the time of your retirement. Organizations with more than 20 employees are required by law to register for the scheme.
The total accumulated amount will be given to you when you retire if certain conditions are satisfied. You can also withdraw your EPF partially under certain circumstances.
The scheme is managed by the Employees' Provident Fund Organisation (EPFO) under the Employees' Provident Fund and Miscellaneous Act, 1952.
EPF offers attractive interest rates of 8.5% for the financial year 2020-21. It enjoys Exempt-Exempt-Exempt (EEE) status in terms of taxation. This means the contributions are deductible from income before tax under Section 80C and the maturity amount is tax-exempt under certain conditions. Lastly, the interest accrued on your contributions is also tax-exempt.
However, starting from April 1, 2021, if you are contributing more than Rs 2.5 lakh to your PF, the excess interest on the contribution above Rs 2.5 lakh will be taxed as per the slab rates applicable to the taxpayer.
Nevertheless, EPF is a convenient saving tool plus a low-risk investment due to government-backing and also offers a pension. For many who work at private organizations, EPF is the only retirement planning tool.
Under the EPF scheme, your employer deducts 12% of your basic salary to monthly contribute towards your EPF account. This contribution is often matched by your employer, i.e another 12%. So, in total, 24% of your basic salary goes to the scheme.
However, 12% of the employer's contribution does not go to your EPF account. Only 3.67% of the contribution is for your EPF account and the remaining 8.33% is directed towards your Employee's Pension Scheme.
Do note that the EPF calculation is only on your 'basic salary' which can comprise your basic and dearness allowance (DA). It does not include HRA, conveyance allowance, special allowance, or other benefits given in your salary slip.
For private companies, there is no DA, so EPF is based on the 'basic' component of your salary
Voluntary Provident Fund
You can also contribute a higher amount than the minimum required contribution to your EPF account. The excess deposit is termed as 'Voluntary Provident Fund'. However, the employer's contribution will remain the same.
Universal Account Number
Every employee under the EPF scheme is allotted a unique Universal Account Number (UAN) by the EPFO. The employee's EPF account is linked with the UAN which is valid throughout the life of the employee.
When switching jobs, the EPF account will stay the same. Employees can give their EPF account details upon joining a new company. This way the contributions towards the EPF account can continue even after switching to a new job.
If you are an Indian planning to leave the country and settle abroad and contribute to EPF or are a Non-resident Indian having an existing EPF account in India, here are the FAQs that you should know about.
Can NRIs Have An Active PF Account?
NRIs can have an active PF account that earns interest till the age of 58 or until withdrawal.
What Happens If An NRI Opens A PF Account?
The only way to have an active PF account by an NRI is to have the account opened when he/she was working in India as an Indian resident and was contributing towards it.
If you are a resident Indian who has been contributing towards the PF account while working in India, the account can remain operative and can continue to earn interest on the accumulated sum even after becoming an NRI.
What Happens To The EPF Account If The NRI Doesn't Close It Before Leaving The Country?
The EPF account will continue to earn interest if an NRI doesn't close it before leaving the country unless there is an application for withdrawal till the person attains 58 years of age.
However, the PF account will become inoperative if an employee does not apply for withdrawal within 36 months of retiring after attaining 55 years of age. If the person is going to settle abroad permanently, it is advised to close the account after withdrawing the total balance.
What Is The Current Interest Rate For A PF Account In India?
The current interest rate for a PF account in India is 8.5%.
What Are The New Rules On Provident Fund Accounts For NRIs In 2021?
According to the Budget 2021, if an employee's contribution towards the PF account exceeds Rs 2.5 lakh in a financial year, the interest earned on the contributions over Rs 2.5 lakh will be taxable in the hands of the employee.
Additionally, if there is no contribution by the employer to the PF account (usually for government employees), the interest is tax-free for deposits up to Rs 5 lakh in a financial year.
As per the Employee Provident Fund Act, if the person is no longer employed in India, he/she will not be eligible to contribute to the PF account. However, it will remain operative even after becoming an NRI.
During the period when the contributions don't get credited to the PF account, the interest earned becomes taxable in his/her hands in the year of credit
What Are The Rules For EPF Withdrawal?
As per the norm, here are the following scenarios where you can withdraw 100% of the EPF:
You can also withdraw if you have completed 5 years of service after being unemployed for 60 days, even if you have not attained the age of 58.
You can be permitted to make partial withdrawals under certain circumstances such as medical emergencies, marriage, home loan repayment, buying a house if you meet the requirements.
Can I Withdraw My EPF When I Am Settling In Another Country?
If you are settling in another country, you can withdraw your complete EPF balance even before your retirement date and close your account. However, you will be required to provide proof that you are leaving India to work and/or settle abroad.
What Is The Process Of Closing A PF Account And Withdrawing The Money?
As An NRI, Where Can I Invest The Money Withdrawn From A PF Account?
There are various options to invest the money withdrawn from a PF account. Here are some of the options:
When Does A PF Account Become 'Inoperative'?
A PF account becomes inoperative and does not earn further interest if the employee retires after attaining the age of 55 or moves to another country permanently or dies and there is no application for withdrawal of the accumulated balance within 36 months.
When Is EPF Withdrawal Taxable?
If you have completed 5 years of service, you can withdraw your EPF corpus with no tax.
If a withdrawal is made before the completion of 5 years of service, additional TDS is levied. The TDS is deducted at the rate of 10% if you furnish your PAN and 34.608% if you are not able to furnish your PAN.
TDS is not levied if the total amount of withdrawal is below Rs 50,000.
Will My PF Account Continue To Earn Interest After Becoming An NRI?
When you become an NRI and stop contributing to your PF account, it will continue to earn interest till you are 58 years of age or until the date of withdrawal.
Should I Close My EPF Account If I Have To Go Abroad For A Short Duration?
You shouldn't close your EPF account if you are going to work abroad for a short duration. You should avoid withdrawing the balance till maturity if you are going to come back to India. Your corpus will remain with the EPFO and will keep earning interest.
Additionally, working in a foreign country will require you to contribute to a retirement scheme/social security scheme just like the EPF. You may not be able to reap the retirement benefits even if you contribute because of the short duration of your stay abroad. Your money may get trapped in the country where you are not to live in retirement.
How Can I Avoid The Social Security Scheme Of A Foreign Country?
You will need to get the Certificate of Coverage (COC) from the EPFO. The COC exempts you from your host country's social security scheme because you are already paying a regular contribution to a retirement scheme in India.
The EPFO is authorized to issue the COC to the employees working in the countries that the government of India had signed the social security agreements (totalization agreement). Till now, India has signed the agreement with 20 countries including Germany, France, Belgium, Canada, Japan, etc.
India is yet to sign the agreement with the U.S. and it may be happening soon. Currently, the U.S. has signed with 24 countries.
You can visit the International Workers Portal given on the EPFO website to generate COC online.
Can I Transfer My EPF Balance To My PPF Account As An NRI?
EPF and PPF (Public Provident Fund) are two different saving schemes. You won't be able to transfer your money from your EPF account to your PPF account.
Also, NRIs are not allowed to open a PPF account. Only Indian residents can open a PPF account.
In case you already have a PPF account before getting the NRI status, you can keep the account open until maturity with some limitations such as it cannot be extended for another 5 years, unlike Indian residents.
You should intimate the bank or post office within 1 month of change for citizenship or residential status. Also, once your status changes, you cannot make fresh contributions to your PPF account.
What Is The Difference Between EPF And PPF?
The PPF is a popular long-term saving scheme backed by the government of India which matures in 15 years. Indian citizens can open a PPF account including non-salaried individuals and a minor.
You cannot invest more than Rs. 1.5 lakh a year and a minimum of Rs. 500 is to be contributed in a year. The current PPF interest rate is 7.1% per annum.
Your PPF contribution is tax-exempt under section 80C of the Income Tax Act and the returns are not taxable as well.
On the other hand, EPF is a retirement saving scheme for salaried employees where both the employee and employer make contributions to the scheme. A total minimum investment of 24% of the basic salary is directed towards the EPF.
Ultimately, the main goal of saving for retirement and making financial investments is to create wealth and achieve financial security so that when we retire we can afford to live comfortably. To build a financially secure future, having a better understanding of your saving schemes and retirement planning tool is crucial.
It is common for a Non-Resident to open an NRE Account or other similar accounts, with a bank in India and transfer their earnings from their foreign country into these accounts. NRI's are not required to pay taxes in India on earnings that they received outside of India however these guidelines are frequently abused. An influx of cases of money laundering and unexplained funds in NRE accounts has prompted the Enforcement Directorate of India (ED) to crack down on irregularities in NRE account activities.In one specific example, an individual transferred a large number of funds into a family members' NRE account. Upon investigation by the ED however, it was found that these funds were commission income which was generated abroad. He was then asked to furnish the overlaying contracts for these commission incomes and was penalized accordingly.As an NRI with an NRE account, it is very important that you are able to explain the source of your funds in your account should you be contacted by the ED. Failure to explain the source of your funds in your account is considered to be a violation and can result in tax penalties.In order to avoid being questioned by the ED in regards to NRE account activity, it is highly recommended that all NRI's protect themselves in the following ways:Distinguish between current account transactions from capital account transactions.Inform all applicable parties regarding any changes in residential status.Distinguish between Person Resident in India & Person Resident Outside India.Keep track of investments made in India from Rupee funds in India. For example, when their residential status is that of a Resident and the investments made from funds remitted from abroad and when their residential status is that of a non-resident.Understand the sale proceeds of movable and immovable assets in India.Comply with statutory guidelines for filing documents and reporting requirements for different transactions.Do not enter into capital account transactions that are prohibited or are not covered under general provisions of permission.Do not enter into current account transactions that are prohibited or restricted.Avoid participating in any " net - off " transaction with a resident individual.Never instruct or allow a resident to make an outward transaction on your behalf.The Foreign Exchange Management Act (FEMA) extends to all of India and makes offenses related to foreign exchange, civil offenses. Such offenses are not taken lightly by the Indian government, which is why it is imperative that these guidelines are abided by and taken seriously as any violations will likely result in penalties and legal action. Running into issues with your NRE account and have to deal with the ED can be extremely stressful and nerve-wracking, which is why it is important to follow the above guidelines in protecting yourself from such circumstances.
Foreign Direct Investment is a scheme by the Government of India to attract and promote foreign investment directly for the industries that need domestic capital to be supplemented and better technology and skills to be infused into the economy of the country to accelerate economic growth. FDI generates more jobs not only in the different sectors in which it is allowed but also in all the associated sectors to those that are allowed. New technologies come into the country, which may or may not include knowledge transfer. This strengthens the country economically as is stated above but also giving individual capital a boost.The government of India revised its foreign direct investment (FDI) norms in the month of June 2016. This has been a path breaking policy change from the past. These changes have made the FDI regime transparent, comprehensive and easy to comprehend. Many industries have been opened up and the feeling is that the non resident investing back in India is most welcome. More so like making it feel like a home coming for the expatriates, who yearn to give back something to their motherland. Non Resident Indians have been included as eligible investors, for the purpose of the FDI Rules and Regulations. There is a list of legal entities which have been mentioned as eligible investees.They are:Indian CompaniesPartnership Firms and Proprietary ConcernsTrustsLimited Liability Companies (LLPs)Investment VehiclesThere are two routes for the same, one being the Automatic Route and the second being the Government Route. In the sectors under automatic route, the foreign entities do not have to seek prior approval from the government but have to inform the Reserve Bank of India (RBI the Indian Regulator) regarding the amount of investment within a specified timeline. Under the government route, the foreign entities have to seek prior approval from the government. This government department is the Foreign Investment Promotion Board (FIPB). The FDI policy limits for different sectors is not uniform.FIPB is a board formed by serving government servants of the level of secretary and constitutes many sub-boards for different sectors. The FIPB reports directly to the Cabinet Committee of economic affairs under the Union Cabinet of the Government of India, which is chaired by the Prime Minister of India. The FIPB has authority to deal with investments up to INR 5000 crores or 50 Billion INR or the US $ 800 million. Anything above this amount goes directly to the cabinet for approval. FIPB has to refer the same to the Union Cabinet.There are cases which would not need fresh approval, if the foreign entity intends to bring in fresh capital into the invested company, provided the same had been approved within the norms before. There could be cases when a certain business activity would have required government approval, in the past, but under the current norms, it has been classified under the automatic route, then also no fresh approval is needed. Also if the overall investment cap has been increased, and then the fresh funds are infused into the business, and now the upper limit of such investment cap has been increased, then also no fresh approval is required.FIPB has facilitated electronic filing of the applications, amendments to applications on their website.Prohibited SectorsLottery Business including Government/private lottery, online lotteries, etc.Gambling and Betting including casinos etc.Chit fundsNidhi companyTrading in Transferable Development Rights (TDRs)Real Estate Business or Construction of Farm Houses (Real estate business does not include the development of townships, construction of residential /commercial premises, roads or bridges)Manufacturing of cigars, cheroots, cigarillos, and cigarettes, of tobacco or of tobacco substitutesActivities/sectors not open to private sector investment e.g. Atomic Energy and Railway operations (other than permitted activities)There could be foreign technology collaborations as well and that would qualify under the FDI norms. This includes licensing for franchises, trademarks, brand name and management contracts is also prohibited under the lottery business and gambling & betting activities.
Foreign Account Tax Compliance Act (FATCA) is a US legislation aimed at combating tax evasion. Under this legislation, you will have to declare all the accounts that you hold beyond the territorial borders of the USA.FATCA & DTAAIndia & the USA have signed a Memorandum of understanding to implement FATCA under the Double Taxation Avoidance Agreement (DTAA) on 9th July 2015. Under the DTAA tax obligation, the Non-Resident will not be charged twice. Additionally, this implies that the tax obligation remains where it is domiciled. The NRI has to declare all their foreign accounts.FATCA effect on the NRIs in the USARecent reports have suggested that the US-based NRIs are selling their immovable properties in India in a rush and are at times even at a heavy discount. There is huge confusion in the NRI communities in the US regarding this aspect and everyone wants to stay clear of regulations. The fear is that under the DTAA there would be data sharing between the US & Indian governments and the properties held by the NRIs would be reported back to the US. Once this is done and the infrastructure in place, the IRS will come calling and levy taxes is the common viewpoint of the NRIs. The effect of this flash sale by the NRIs have also triggered a domino effect as regards the property prices. There is a stagnation in the property prices in India. In retrospect, if we see, the occupancy rate of the stock in hand for immovable properties was already low to around 43%, even when the prices were increasing at a modest 8-9% year on year. Occupancy means a property being sold & the possession handed over, irrespective of the fact that anyone actually living in the same. The NRI bought this property as an investment tool to take advantage of the rapidly growing Indian economy. Now they find themselves in a fix whether to hold on to the property or sell it off.FATCA & RemittancesThe DTAA & the implementation of FATCA has given a great boost to the outward remittances from India. The NRIs are selling their properties in India at whatever price they get and repatriating the money abroad under the Liberalized Remittance Scheme(LRS). Under the LRS a resident Indian can send money equivalent to US $ 250,000 in a financial year. The NRIs are first transferring the property in the name of a resident Indian close relative and then that relative is sending the money out to the NRIs account in the US.This is one of the reasons that the outward remittance in 2015-16, under LRS and categorized as travel and maintenance of close relatives have grown more than 3200% and 402% respectively over the last financial year of 2014-15. In aggregate the outward remittances which usually has had a growth trend of 19-21% year over a year till 2014-15, grew to 128% in 2015-16.2016-17 will be by no means any lesser than the last year. The figures published by RBI states that this financial year till 30th September, the outward remittances under LRS has almost equal to the last financial year figures and are at the US $ 4.14 Billion already, which is 89% of last financial year. Out of this the remittances going towards travel has already surpassed by the double. There could be tax implications for the NRI or his close relative (to whom the gifts the property) who is, in turn, repatriating the money abroad. We will deal with the US & Indian tax implications of this in a later article.
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