Who is Joe Generic for SSF?
Every employee in employment engagement is Joe Generic for the purpose of participation in Social Security Fund in Nepal.
How does Joe Generic contribute in SSF?
Contribution from Joe Generic’s Employer
Employer’s contribution in SSF is 20% of basic salary. Once the employer makes this contribution to the SSF in the account of the employee, employer doesn’t have to make these contribution as required by Labor Act 2074:
- Provident Fund contribution under Section 52 of Labor Act 2074 (10% of basic salary)
- Gratuity contribution under Section 53 of Labor Act 2074 (8.33% of basic salary)
- Contribution on minimum medical insurance of Rs. 100,000 under Section 54 of Labor Act 2074 (50% if the premium amount)
- Contribution on minimum accident insurance of Rs. 700,000 under Section 55 of Labor Act 2074 (100% if the premium amount)
Contribution from Joe Generic Himself
Employee’s contribution in SSF is 11% of basic salary. Employer would deduct this amount from the remuneration and will deposit this contribution to the SSF in the account of the employee. Once this contribution is made, employee doesn’t have to make these contribution as required by Labor Act 2074:
- Provident Fund contribution under Section 52 of Labor Act 2074 (10% of basic salary)
- Contribution on minimum medical insurance of Rs. 100,000 under Section 54 of Labor Act 2074 (50% if the premium amount)
How is the contribution to SSF be reflected in Joe Generic’s payslip?
| Heading | Amount | |
| Add | Basic Salary (Minimum to be 60% as per Labor Act) | 60 |
| Add | Allowances | 40 |
| Gives | Total Salary | 100 |
| Add | SSF Contribution Employer (Basic Salary×20%) | 12 |
| Gives | Taxable Salary | 112 |
| Less | SSF Contribution Employer (Basic Salary×20%) | (12) |
| Less | SSF Contribution Employee (Basic Salary×11%) | (6.6) |
| Less | Tax Deduction at Source (say, 3.4) | (3.4) |
| Gives | Net Payable | 90 |
How will the contributions of Joe Generic and his employer be utilized?
20% from Joe’s Employer and 11% from Joe himself totals to 31% of basic salary as contribution in the account of the Joe Generic SSF Account. This however is a minimum contribution only. If Joe Generic is interested he can deposit additional amount as well. Such additional amount will be accounted in “Retirement Plan Scheme” of Old Age Scheme of the SSF.
Joe Generic must contribute 11% of Joe’s basic salary, Joe’s Employer must contribute 20% of Joe’s basic salary. In addition to this Joe may opt contribute additional amount say Rs. X to SSF. The total of all these contributions will utilized in the operation of the schemes under SSF as follows:
- Medical, Health and Maternity Scheme
1% of Joe’s Basic SalaryMedical Scheme
Maternity Scheme
Health Scheme
- Accident and Disability Scheme
1.4% of Joe’s Basic SalaryEmployment Related Accident/Illness Scheme
Other Accident/Treatment Scheme other than Road/Natural Accident
- Dependent Family Security Scheme
0.27% of Joe’s Basic SalaryObsequies Scheme
Spouse Pension Scheme
Children Education Scheme
Dependent Parents Pension Scheme
- Old Age Scheme
Retirement Plan Scheme
8.33% of Joe’s Basic Salary + Rs. X + MAX(20% of Joe’s Basic Salary – 3 × Prevalent Minimum Basic Remuneration, 0)Pension Scheme
20% of Joe’s Basic Salary – MAX(20% of Joe’s Basic Salary – 3 × Prevalent Minimum Basic Remuneration, 0)
However, all the amount accrued to be deposited in Pension Scheme until before 2078.04.01 shall also be included in Retirement Plan Scheme. View how these plans operate in detail here Confusions surrounding Social Security Fund (SSF)
Can Joe Generic opt not to participate in SSF?
No, Joe Generic, this is not possible.
Will Joe Generic receive tax benefits from participating in SSF?
View One
An individual making contribution to an approved retirement fund is eligible to reduce the contribution amount (inlcuding the contribution made by both employer and employee) from their taxable income in a prescribed limit.
Rule 21 of Income Tax Rule 2059 states that: An individual who is a beneficiary of an approved retirement fund may reduce, as retirement contribution made to the fund, the lower of Rs. 300000 or one third of his assessable income from his taxable income. But, an individual who is a beneficiary of Social Security Fund established as per Contribution Based Social Security Act 2074 may reduce, as contribution made to the fund, the lower of Rs. 500000 or one third of his assessable income from his taxable income. Also, as per Section 63(1) of the Income Tax Act 2058, Social Security Fund is also an Approved Retirement Fund.
Meaning and Example:
Lets say, for an income year, An individual has Rs. “Z” assessable income and has contribution of Rs. “X” in ARF and Rs. “Y” in SSF (including both employer and employee). Either:
1. He can deduct minimum of (X+Y) OR (300000) OR (Z/3), or
2. He can deduct minimum of (Y) OR (500000) OR (Z/3)
Option 1 is beneficial if Y<300000 and Option 2 is beneficial if Y>300000.
There is also an addtional confusion in the market concerning if the contribution made by the employer into Social Security Fund is taxable at the hands of the employee at the point of contribution.
View Two
Firstly, a concern is, taking conservative view tax officers could argue that where contribution is made in both SSF and CIT, only contributions made up to a limit of 300,000 is eligible for reduction.
Let’s take an example where one-third of a person’s assessable income equals 600,000 and the amount required to be deposited to SSF is 330,000. With an intention of saving, he deposited 170,000 additionally in CIT. In this view, the person will be eligible to reduce only 300,000 from his income. [Here, 300,000 is the minimum of (i) 600,000 (ii) 300,000 or (iii) 330,000 + 170,000]
Clearly, this view would defeat the intention of providing additional benefit to SSF participants. Here the person’s decision to make additional savings in CIT is putting him at disadvantaged position.
Secondly, another concern is, taking conservative view tax officers could argue that only SSF contribution up to a limit of 500,000 is eligible for reduction. Let’s take an example where one-third of a person’s assessable income equals 600,000 and the amount required to be deposited to SSF is 280,000. With an intention of saving, he deposited 220,000 additionally in CIT. In this view, the person will be eligible to reduce only 280,000 from his income. [Here, 280,000 is the minimum of (i) 600,000 (ii) 500,000 or (iii) 280,000]
Clearly, even this view defeats the intention of providing additional benefit to SSF participants. Here the person’s decision to participate in SSF is putting him at disadvantaged position.
It cannot be fully assured that tax officer will not take an alternative view as discussed above regarding the amount eligible for deduction. However, taking in note the development in Income Tax Laws, SSF Laws and intention behind the provision and adverse tax implication on taxpayers on alternative views, we can relatively conclude that this liberal view is is equitable and substantiated.
Is employer's SSF contribution taxable at the hands of employee?
In my view the entire SSF plan is a contributory plan, hence, we can view the entire 20% contribution of employer to be the employer’s contribution on the contributory-social-security-plan of the employee. In this regard and in spirit of the meaning of contributory plan (in a contributory plan, the employee pays into the plan from their income) the amount of entire 20% SSF contribution should be treated as a part of employee’s income for the year and be taxed on normal slab basis.
The principle behind the contributory plan is, in a contributory plan there is a investment interest of employee in the amount deposited. The employer’s contribution of 20% is a payment as per the terms of employment which is deposited in schemes under Social Security Fund, which is essentially an addition in the investment amount of the employer in SSF. This increment in investment interest of the employer as per the terms of employment is hence an employment income. However, at the point of the distribution of the amount from the fund, it will be the disbursement of the interest of an employee in a retirement fund, thus, it will be treated in the form of investment income rather than employment income, the taxability of which has been discussed below.
Will Joe Generic's benefits received from SSF be taxed?
Here it should be noted that the contribution made by the employer (20% of the Basic Salary) and employee (11% of the Basic Salary) will be utilized in various schemes of the Social Security Fund Program as follows:
- Medical, Health and Maternity Scheme (1%)
- Accident and Disability Scheme (1.4%)
- Dependent Family Security Scheme (0.27%)
- Old Age Scheme (28.33%)
However, even in between these four schemes, there are distinct difference between the first three schemes and the last one. Contributions made in Old Age Scheme is a type of contribution made into Retirement Fund. However, the contribution made in other funds (Medical, Health and Maternity Scheme; Accident and Disability Scheme; Dependent Family Security Scheme) constitutes a non-life insurance plan, in nature. Thus, their taxability will be different in the context of characterization as per Income Tax Act 2058. To be more precise here, an exception to Section 31 of Income Tax Act 2058, on Characterization of Compensation Payments provides that:
1. Compensation payments received by resident natural person in relation to the corporal (body) damage caused by personal accidents need not be included in the income.
2. Compensation payments received in relation to the death of a natural person need not be included in the income.
This provision intends to provide the exception that when the compensation is derived only as a result of the personal accident or death of an indivdual, then they need not be included in computation of income.
However, the payment made under Old Age Scheme will be treated as amount derived from approved retirement fund and its taxation will depend on the provision of the Income Tax Act 2058. As per Section 88(1)(1): 5% withholding is made on retirement payment gain (RPG) for retirement payment (RP) by GON or contributory retirement payment made by ARF. RPG = RP-MAX[500000,RP×50%]
Furthermore, as per Section 92(1)(Chha): RP made by GON/ARF/UARF and all other RP (except for regular pension received under pension scheme) are treated as payment made after final withholding taxation.
Find more detail about this in my next blog Will I be taxed on my Social Security Benefits?
Can Joe Generic take loan from SSF?
Yes this is possible. View my another blog here to see how the loan products from SSF works: can i take loan from SSF now?