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Article | Global News Briefs

India: Employer retirement contribution, industrial relations proposals

Retirement|Health and Benefits|Total Rewards

By Ritobrata Sarkar and Jehangir Damkevala | April 3, 2020

Limit on employer retirement contributions could increase tax burdens for high earners and likely complicate administration for employers.

Employer Action Code: Monitor

India’s proposed 2020 Budget (for the financial year 2020 – 2021) would limit tax-favored employer contributions to retirement and other long-term saving plans for highly compensated employees, among other things. At the same time, parliament is considering legislation that would consolidate, and in some matters update, three existing acts (the Industrial Disputes Act, the Trade Union Act and the Industrial Employment [Standing Orders] Act) as a new single Industrial Relations Code (IRC). The proposed IRC would introduce new rules on collective redundancies and severance for collective dismissals, equalize the treatment of fixed-term and indefinite-term employment, and make it easier for unions to gain workplace recognition, among other changes.

Key details

Changes under the proposed 2020 Budget (see Budget 2020 Announcements: Potential impact on Retirement Benefits in India for further details)

  • Effective April 1, 2021, employer contributions in a financial year to a recognized provident fund, approved superannuation plan or the National Pension System (in aggregate) exceeding INR 750,000 for an employee, as well as interest on such excess contributions, would be considered a taxable perquisite and be subject to personal income tax.
  • Effective April 1, 2020, taxpayers would have a choice of filing their income tax assessments under the existing tax regime or a new regime. The latter would be based on a more progressive tax rate schedule; however, the individual would have to forego several tax deductions/exemptions (e.g., for employee contributions to the Employees’ Provident Fund, the National Pension System, life and medical insurance premiums, and rent allowances).

Changes under the proposed Industrial Relations Code

  • If there is one registered union in the company, employers would be required to recognize it for the purposes of employee representation. If two or more unions are registered, recognition would apply to the union supported by at least 75% of the workers; if none has 75% support, the government or an authorized officer may establish a negotiating council.
  • Employers would be required to contribute to a new “re-skilling” fund at a rate of 15 days’ pay for each employee made redundant. Workers would be able to claim 15 days’ wages from the fund within 45 days of being made redundant.
  • Under current law, generally, industrial establishments with 100 or more workers must obtain central or state government permission before the layoff or retrenchment of a worker (the threshold is 300 under some state laws). The IRC would give central and state governments the power to modify, by notification, this workforce threshold figure.
  • Fixed-term employees would be entitled to the same statutory social security benefits and wages as regular employees who perform equal work.

Employer implications

The aggregate limit on tax-favorable employer retirement contributions could reduce retirement savings or increase tax burdens for high earners and would likely be extremely complicated for employers and employees to administer, even after necessary clarifying guidance is issued. The choice of income tax assessment regime would be up to the employee; however, as part of this decision the employee should consider not only possibly lower marginal tax rates but also the loss of deductions related to retirement contributions, benefits and allowances. The draft IRC is intended to simplify and modernize the regulatory relations framework for factories and industrial establishments and thereby encourage investment in manufacturing; at the same time, many of the provisions of the underlying existing acts would be retained as part of the IRC. However, the IRC has been criticized for transferring power from the Legislature to the Executive. A newly introduced provision allows the government to alter the threshold number of employees of an establishment seeking permission from the central/state government to retrench workers. Other provisions, such as “mass casual leave” being brought within the definition of a “strike,” have also raised concerns.


Ritobrata Sarkar
Head of Retirement - India
Willis Towers Watson

Jehangir Damkevala
Retirement Trust Consulting Leader - India

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