Regulation of state and supplementary pension schemes in India: overview

A Q&A guide to pensions law in India.

The Q&A gives a high level overview of the key practical issues including: state pensions; supplementary pensions; funding and solvency requirements; tax on pensions; business transfers; participation in pension schemes; and employer insolvency and overall scheme solvency.

To compare answers across multiple jurisdictions, visit the Pensions: Country Q&A tool.

The Q&A is part of the global guide to pensions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/pensions-guide.

Contents

Pensions

State pensions

1. Do employers and/or employees make pension contributions to the government in your jurisdiction?

Contributions paid to the government

The Pension Scheme is provided under the EPF Act and contributions to it are diverted from the contribution made under the PF Scheme (the employer does not need to make this payment separately). The employer's contribution under the Pension Scheme is 8.33% of its contribution to the PF Scheme (which is capped at wages of INR15,000 per month). Existing members whose monthly salary is in excess of INR15,000 as on 1 September 2014 can continue with their membership, provided they exercise the option to continue to contribute in excess of INR15,000 within six months from 1 September 2014, and they are required to make a contribution at a fixed rate of 1.16% on salary exceeding INR15,000 under the scheme.

Taxation of contributions

Where pension contributions are made to a recognised provident fund, those contributions can be deducted by both the employer and the employee when calculating their liability to income tax (subject to any applicable caps that may apply).

Monthly amount of the government pension

The government pension is calculated on the basis of the employee's length of service and the pension contributions paid from salary. There is no fixed average amount that is paid as pension.

 

Supplementary pensions

2. Is it common (or compulsory) for employers to provide access, or contribute, to supplementary pension schemes for their employees? If they do, are they:
  • Occupational (that is, linked to an employment or professional relationship between the plan member and the entity that establishes the plan)?

  • Personal (that is, not linked to an employment relationship, established and administered directly by a pension fund or a financial institution acting as pension provider, where individuals independently purchase and select material aspects of the arrangements, though the employer may make contributions).

Unless required under the EPF Act, employers are not required to provide access to or contribute to supplementary pension schemes for their employees. Supplementary schemes are not common in India and where present, the terms of supplementary pensions are largely commercially driven.

 
3. Where supplementary schemes are provided, do these schemes provide pensions, the value of which:
  • Is linked to the employee's salary (defined benefit)?

  • Is linked to employer and/or employee contributions and investment return on those contributions (defined contribution)?

 
4. For supplementary pensions:
  • Is there a minimum period of service before workers are entitled to receive vested rights?

  • Are there any legal requirements for schemes or providers to index pensions in payment and/or revalue pension rights in deferment?

Funding and solvency requirements

5. In relation to supplementary schemes, are these generally funded or unfunded? If funded, are there any solvency requirements on the sponsoring employer or provider?
 
6. In relation to access for members to the funds in their supplementary pension scheme:
  • To what extent can members transfer their funds to another pension scheme?

  • How do members normally take the benefit of their funds (for example, lump sums, income withdrawals (drawdown), life annuity arrangements)?

  • What are the legal restrictions upon access to the funds (for example, age)?

  • What are the common arrangements for early retirement and ill-health retirement?

  • Are dependants of deceased members entitled to receive benefits payable on the member's death? What form do these commonly take?

 
7. Is there a regulatory body that oversees the operation of supplementary pension schemes? Do any other governance regimes apply to supplementary pension schemes?

Regulatory body

The Pension Fund Regulatory and Development Authority (PFRDA) was established by an Executive Order of the central government in 2003 and has been accorded statutory status by the PFRDA Act 2013 which has been notified by the Government and became effective on 1 February 2014. The National Pension System has been set up under it and has been made available to every citizen, including workers of unorganised sectors, from 1 May 2009 on a voluntary basis and employers in the private sector are not mandatorily required to make any contributions to the pension system. Employers generally obtain annuities through insurers, which are regulated by the Insurance Regulatory and Development Authority (IRDA).

Regulatory framework

Currently, pension schemes issued by an insurer in India are regulated by the Insurance Act 1938. The PFRDA performs promotional, developmental and regulatory functions relating to the pension system. It also has the power to impose penalties for regulatory violations. The rate of contributions to be made under the National Pension Scheme as provided by PFRDA differs for various types of employees, including government employees, corporate individuals and unorganised sector workers.

Other key governance requirements

See Question 2.

Penalties for non-compliance

Penalties for non-compliance with the provisions of the PFRDA Act vary for intermediaries and companies and range from INR100,000 to INR250 million. Violations of the PFRDA Act may also expose the offender to the additional risk of imprisonment ranging from one month to ten years, depending on the severity of the offence committed.

 

Tax on pensions

8. Are any tax reliefs available on contributions to supplementary pension schemes (by the employer and employees)?

Tax relief on employer contributions

Pension contributions made by an employer to the account of an employee for a pension scheme notified by the Central Government or to an approved superannuation fund can be deducted in the calculation of the total income of the employer (subject to certain applicable caps).

The tax implications, in the hands of the employees, of employer's contribution to pension schemes can vary depending upon the type of scheme.

Tax relief on employee contributions

See above, Tax relief on employer contributions.

 
9. Are there any approval or registration requirements with the local tax authority where a supplementary scheme is established?

In the case of a superannuation scheme (that is, a pension scheme created by a company for the benefit of its employees), the tax benefits are only available if the superannuation fund is approved by the tax authorities.

 
10. What is the tax treatment of investments made by the scheme?

The following schemes are exempt from tax:

  • Income of superannuation funds approved by the tax authorities.

  • Pension funds set up by life insurance companies.

  • Pension funds set up by eligible mutual funds.

  • Pension schemes notified by the Central Government.

 
11. What is the tax treatment of pension and lump sum payments made to members?

As a general rule, periodical pensions are taxable in the hands of the recipient employee. However, where the pension is allowed to be commuted (for example, where a lump sum payment is made) on account of death or retirement or incapacitation of the beneficiary, the lump sum payment is exempt from tax (subject to permissible limits that may apply).

 
12. Are there any other applicable tax charges on schemes?

If any payments made by a superannuation fund are taxable in the hands of the employee, the superannuation fund would be required to withhold taxes at the applicable rates.

Business transfers

 
13. Is there any legal protection of employees' pension rights on a business transfer?

Transfer of accrued pension rights

Indian law does not provide for the automatic transfer of pension rights. The transferee is not under any obligation to provide the same pension benefits to the employees post-transfer unless he has agreed to do so.

Employees who are covered by the EPF Act must apply for a scheme certificate from the provident fund authority indicating the pension amount due on the date of exit from employment with the transferor. The previous pension due will then be considered under that certificate along with the new pension available to him under the transferee.

Other protection for pension rights

There are no further provisions for the protection of pension rights.

Participation in pension schemes

 
14. Can the following participate in a pension scheme established by a parent company in your jurisdiction:
  • Employees who are working abroad?

  • Employees of a foreign subsidiary company?

Employees working abroad

Employees of Indian companies who are sent out of India on work but continue their employment with the Indian company will continue to be a part of the pension scheme. The tax treatment remains the same as that outlined in Question 8.

Employees of a foreign subsidiary company

An insurer requires central government approval to cover persons resident outside of India, and so a parent company's insurance cover in India will generally not cover the employees of a foreign subsidiary company.

Employer insolvency and overall scheme solvency

15. Is there any protection provided for pension scheme benefits where the sponsoring employer becomes insolvent? If so, who provides the protection, and how does this operate? If the scheme itself is underfunded, are there any funding obligations on connected or associated legal entities?

The insolvency of the sponsoring employer company will not have any bearing on the protection provided by the statutory pension scheme. In the case of private pension schemes issued through insurers, the payment of the accumulated amount will be paid out by the insurer under the terms of the insurance policy.

 

Online resources

Bureau of Immigration, India

W http://boi.gov.in/index.php

Description. This is the official website for the Bureau of Immigration, maintained by the government and containing English translations.

Ministry of Labour and Employment

W www.labour.nic.in

Description. This is the official website for the Ministry of Labour and Employment, maintained by the government and containing English translations.

Ministry of Home Affairs

W www.mha.nic.in/pdfs/work_visa_faq.pdf

Description. This is the official website for the Ministry of Home Affairs, maintained by the government and containing English translations.

PRS Legislative Research

W www.prsindia.org/downloads/bills-pending-in-parliament/

Description. This is the official website of PRS Legislative Research, maintained by the government and containing English translations.

India Code Legislative Branch

W www.indiacode.nic.in

Description. This is the official website of India Code, maintained by the government and containing English translations.



Contributor profiles

Nohid Nooreyezdan

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