Did you know you could be taxed on withdrawal of Indian Provident Fund in Australia?
You may be an Indian tax resident or an Australian tax resident, depending upon your physical presence, intention of stay and other factors relevant for determining your residency in each of the jurisdiction. In some of complex circumstances, you may also need to evaluate your tax residency after considering the India-Australia Double Tax Agreement (‘DTA’).
If you’re an Australian tax resident who has withdrawn funds from an Indian Provident Fund (PF), such as the Employee’s Provident Fund (EPF), it is important to understand how this income is treated under Indian and Australian tax law.
Tax Treatment of Indian Provident Fund Withdrawals in India
Generally speaking, you will be taxed in India, if you withdraw from your PF prior to five years of continuous service, except in case of medical emergencies. In a scenario where you withdraw the funds from your PF prior to five years, you will be subject to withholding taxes in India based on Indian marginal tax rates. However, your contributions into the PF will still be exempt from tax in India.
Tax Treatment of Indian Provident Fund Withdrawals in Australia
In Australia, withdrawals from overseas ‘retirement’ funds are generally taxed under one of two regimes i.e. either as a foreign superannuation fund or a foreign trust. There are stricter restrictions on withdrawing funds from superannuation funds (similar to a provident fund) in Australia. Indian PFs meeting these stricter requirements will qualify as foreign superannuation funds. The appropriate taxing regime is determined with reference to the characteristics of the funds from which the withdrawals are made. Therefore, it becomes essential to evaluate whether the Indian PF qualifies as a foreign superannuation fund or foreign trust as the taxation is different. Whilst treating the fund as foreign superannuation fund is favourable from an Australian tax perspective, most of Indian PFs will be regarded as foreign trusts. As a result, the fund’s total accrued earnings, including earnings accrued before you became an Australian resident, may be subject to tax in Australia under Section 99B of the Income Tax Assessment Act 1936, which deals with income from foreign trusts.
DTA Considerations
Australia and India have a DTA, which aims to prevent the same income from being taxed by both countries. However, the specific provisions of the DTA regarding retirement fund withdrawals can be complex, including in relation to whether withdrawals from your Indian PF would be pension payments for the purposes of the DTA, in which case they would not be subject to Indian tax. On the basis that withdrawals from your Indian PF are not pension payments for the purposes of the DTA, the credit for any taxes paid in India on withdrawal of your Indian PF will be restricted to the extent of taxes payable in Australia.
Social Security Agreement Between Australia and India
The Social Security Agreement (SSA) between Australia and India, effective from 1 January 2016, allows for the totalization of social security contributions. This means that periods of coverage under the social security laws of one country can be counted towards meeting the eligibility requirements for benefits in the other country. However, there are several conditions to be fulfilled in both the countries including receiving certificate of coverage from the Employee’ Provident Fund Organisation, access to Australian pension upon meeting a specified age, duration of employment in Australia etc.
The tax implications in both Australia and India will vary depending on whether you are a temporary resident or a permanent resident of Australia.
Next steps
It is important to determine whether your Indian PF qualifies as a foreign superannuation fund or a foreign trust. At Nexia, we specialise in:
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Advising clients on their withdrawals from Indian PF and its potential tax implications considering the tax residency status and timing of such withdrawal;
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Resolving the complexities of international tax laws and the potential for double taxation and
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Providing compliance services (including appropriate reporting in their Australian tax returns).
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Contact our team with expertise in both Australian and Indian tax matters today.
