US Taxation of Indian Employee Provident Fund Plans (EPF)

India EPF Pension Plan Taxable in US

US Tax of Indian Employee Provident Fund

One of the most common types 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.

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

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 to 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 distinctions as well.

EPF Contributions 

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 12% of wages, which a is voluntary contribution referred to as a Voluntary Provident Fund. Like the 401K and several other country occupation or employment pension plans, the accrued growth is (generally) 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.

EPF Distributions (Tax Treaty Article 20)

When it comes to non-public Pensions, the US/India Tax treaty provides that the taxation is based on the residence of the Taxpayer.

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.

What does this mean?

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.)

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.”

What does this mean?

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)

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.