India Employer Social Security Payments Not Taxable Income to Employee

In a recent case, the High Court of Delhi, India addressed the issue of whether contributions made by a foreign employer of workers in India to foreign social security, medical, and pension benefits are taxable income to the employee.

In the case of Yoshio Kubo v. Commissioner of Income Tax, the Tax Commissioner contended that such payments were taxable perquisites under Section 17(1) of the India tax law. They were for the benefit of the employee, and vested in the employee. The employer contended that the payments did not confer an immediate vested benefit because any benefit would only accrue at the time any benefits were withdrawn.

This is not an issue in many countries to which foreign employees are assigned because the United States and those countries have entered into so-called “totalization agreements” under which U.S. Social Security Taxes are not necessary if the company is paying such taxes under the other country’s welfare system. However, the United States and India do not have a totalization agreement.

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In the India case, lower courts agreed with the employer, and the case moved to the Delhi High Court on appeal. That court strongly endorsed the employer’s position that the employees had no immediate right to the benefits, which were held as investments until the employees satisfied conditions (such as age) necessary for access to them. The court also rejected an argument by the Tax Commission that the law had changed when the India tax laws were revised in 1961.

Since there was no immediate vested benefit, the payments were not taxable income to the employees or subject to the India tax rules on perquisites.

How This Impacts Mobility

A contrary decision would have greatly increased the costs for companies with employees working in India. Companies that are continuing to pay U.S. or other home country Social Security, medical benefits, or pension contributions will not have to account for them for Indian income tax purposes.

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