US Tax of Indian Employee Provident Fund
US Taxation of India Pension & Employee Provident Fund: The taxation and reporting of overseas pension plans in the U.S. is hard stuff — and the reporting of the Indian EPF (and other Indian pensions) is no exception.
There are various different types of pension plans in India. The most common type of occupational pension for employees is the EPF (Employee Provident Fund). When it comes to U.S. Taxation of India EPF, there is a bilateral tax treaty between the U.S. and India. There is also a FATCA Agreement.
These types of agreements impact how the IRS treats the income, growth and reporting for FBAR & FATCA (Form 8938).
*Even if the FATCA Agreement exempts the Indian institution housing the EPF from reporting the EPF, Individuals with EPF still have an FBAR and FATCA reporting requirement.
With the IRS taking an aggressive position on matters involving foreign accounts compliance and foreign income reporting – staying in tax compliance is crucial.
We will summarize the US Taxation of India Employee Provident Fund.
Golding & Golding has prepared other articles on issues of the EPF and FBAR Reporting, as well as EPF and FATCA Form 8938.
Indian Pension System
The India Pension System can be broken down into different categories:
- Old Age/Social Security
- Employees Provident Fund (EPF)
- Exempted Funds (In Lieu of EPF)
- Voluntary Private Pension
- Other Funds for Government and other employees
Employee Provident Fund (EPF) & US Tax
In India, the Employee Provident Fund or EPF came into existence 1952.
The EPF is managed by a Central Board of Trustees comprised of different government factions (State and Federal). The Employee Provident Fund Is utilized by employers small and large, in which the employer and employee contribute (usually) equal amounts into the fund.
There are certain restrictions for contributions based on employee earnings.
The fund accrues during employment, and then at retirement the employee has various withdrawal options available. (Throughout the life of the EPF, certain situations allow early withdrawal).
Thus, while the US Tax of India Employee Provident Funds is similar to U.S. funds, such as a 401K, it has its own set of distinction as well.
Like a 401K, both the employer and employee contribute to the fund (12% of wages). There may be a limited rate for smaller employers.
The Employee may also contribute additional salary above the 12% of wages, which a is voluntary contribution referred to as Voluntary Provident Fund.
Like the 401K and several other country occupation or employment pension plans, the accrued growth is tax free.
Unlike other countries, there is no concrete exemption of deduction available to U.S. persons who contribute to the EPF but also have a U.S. tax return filing requirement.
If a person wants to take the position that the contributions are deductible (similar to a 401K), they would take a Form 8833 treaty position on the issue of how the US Tax of India Employee Provident Funds (EPF) contributions is applied.
Tax Treaty Article 20 & EPF
Pursuant to Article 20, pension is generally taxable by the country of residence.
Therefore, if a U.S. person has an Indian Pension and resides in the U.S. – the U.S. would have the right to tax the pension income:
Article 20 (1)
“Any pension, other than a pension referred to in Article 19 (Remuneration and Pensions in Respect of Government Service), or any annuity derived by a resident of a Contracting State from sources within the other Contracting State may be taxed only in the first-mentioned Contracting State.
Tax Treaty on Pension Translation
It means if:
- A tax resident of the Contracting State (U.S.)
- Receives a pension or annuity
- From the other contracting State (India)
- It may only be taxed in the first state (U.S.)
Other Types of Indian Pension
India has other types of pension in place, which are less common and beyond the scope of this article.
Indian Social Security & U.S. Tax
Unlike Pension, Social Security is taxed differently, and is generally only taxed by the country of source.
Article 20 (2)
As provided by the U.S. India-Tax Tax Treaty:
Notwithstanding paragraph 1, and subject to the provisions of Article 19 (Remuneration and Pensions in Respect of Government Service), social security benefits and other public pensions paid by a Contracting State to a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.”
Tax Treaty on Social Security Translation
It means if:
- Benefits paid by a Contracting State (India)
- to a Resident of the other Contracting State (U.S.)
- Shall only be Taxable
- In the First-Mentioned State (India)
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