Here we go again, discussing SSF – nothing new recently – although a new question popped up, not that it was not discussed earlier, but this asks for detailed clarification.
Question: What is the process of transitioning from other retirement funds to SSF? What are its implications on the employer and employee, especially focusing on whether the employee can have their accumulated amount in old retirement funds released to them while transitioning into SSF?
Before we start – here are some old posts related to SSF:
Debunking the Social Security Fund of Nepal
Confusions surrounding Social Security Fund (SSF)
Joe Generic is a participant of SSF in Nepal
Will I be taxed on my Social Security Benefits?
Can I take loan from SSF now?
Yet another few FAQs on Social Security Fund
Bedbahadur vs. Rastriya Banijya Bank
Retirement Funds and its Types
Okay, let’s first begin by understanding the nature and meaning of retirement funds. Retirement planning, in a financial context, refers to the allocation of savings or revenue for retirement. Nothing more. Retirement planning is ideally a life-long process. You can start at any time, but it works best if you factor it into your financial planning from the beginning. That’s the best way to ensure a safe, secure – and fun – retirement. The fun part is why it makes sense to pay attention to the serious and perhaps boring part: planning how you’ll get there.
On the basis of the nature of contribution
Retirement funds on the basis of nature of contribution can be divided into two types: Contributory and Non-contributory Retirement Fund.
In a contributory plan, the employee pays into the plan from their income. When the employee pays into a plan from their income to be later received after a certain time, essentially in general understanding, it becomes a form of investment. This contribution of the employee into the plan creates an interest of the employee in the plan. In this principle, if the employer also contributes into the plan, then it becomes an addition into his interest in the plan, so it becomes his taxable income. The employer’s contribution into this employee’s investment is basically the exact equivalent to cash contribution. This is a reason for why the employer’s contribution into a contributory plan is stubbed as an income head in the payslip of the employee, despite the fact that investment and employment income of employees is recognized on a cash basis in the context of Nepal. This is the reason why an employer’s contribution to Provident Fund / Citizen Investment Trust is treated as income of the employee at the time of contribution while at the same time Gratuity Contribution made by the employer is not. In the context of tax laws of Nepal, although the interest of the beneficiary in contributory plan is an investment it has been specifically excluded from the definition of the non-business chargeable assets as there is a separate tax mechanism to it.
In a non-contributory plan, only the employer contributes. When the employee doesn’t contribute to the plan, essentially in general understanding, the employee has no interest in the plan (“interest of employee” not to be confused with “entitlement of employee”). So the contributions made by the employer are not stubbed as an income head in the payslip of the employee unless they are actually paid to the employee at the point of retirement or death.
On the basis of the nature of management
Retirement funds on the basis of nature of management can be divided into two types: Funds Managed by the Employer, Funds independent to the Employer.
For funds managed by the employer (eg. locally managed provident fund plan, separate retirement fund but effectively managed by the employer), the employer takes an active role in managing the retirement plan on behalf of its employers where the employer is responsible for selecting the investment options, overseeing the administration of the retirement fund. Unlike Employer Managed Funds, funds like – Citizen Investment Trusts (CIT), Provident Fund (PF), Social Security Fund (SSF) and even other non-statutory funds are either statutorily or by organizational arrangement designed to be independent of the employer.
On the basis of the nature of taxation
Retirement funds on the basis of nature of taxation can be divided into two types: Approved Retirement Fund and Unapproved Retirement Fund.
Approved retirement funds for the purpose of Income Tax Act, 2058 are those retirement funds that have obtained approval under Section 63 of the Act or institutions like PF, CIT and SSF that are treated as approved retirement funds under Section 63. Rule 20 of the Income Tax Rules, 2059 lists some conditions that are required to be fulfilled by a retirement fund to be treated as an approved retirement fund under income tax laws. Such institutions are required to maintain a minimum capital of one crore, at least one thousand minimum number of beneficiaries, independent of the employer and subject to audit by the Office of Auditor General. Once a retirement fund is an approved retirement fund for the purpose of Income Tax Act, separate tax treatment applies to it from that to the unapproved one.
Retirement Fund | Taxation of Fund | Taxation of Beneficiary at the point of contribution | Taxation of Beneficiary at the point of distribution |
Approved Contributory Plan | The gains accrued by the fund will not be subjected to income taxation. [Section 64(2) of Income Tax Act, 2058] | The employer’s contribution into the fund will be subjected to income tax by including it in the employment income stub of the employee. [Section 8(2)(Cha) of Income Tax Act, 2058] | The retirement payment gain at the time of disbursement will be taxed at 5%. [Section 88(1) Proviso (1) of the Income Tax Act, 2058] |
Unapproved Contributory Plan | The gains accrued by the fund will be subjected to income taxation. [No tax exemption provided to Unapproved Plan] | The employer’s contribution into the fund will be subjected to income tax by including it in the employment income stub of the employee. [Section 8(2)(Cha) of the Income Tax Act, 2058] | The retirement payment gain at the time of disbursement will be taxed at 5% if paid by resident plan, else at 15% if paid by non resident plan. [Section 88(2)(Ga) of Income Tax Act, 2058] Clarification provided in Section 65 of the Income Tax Act, 2058 provides the method of determining the amount of gain from the unapproved contributory plan. Retirement Payment Gain = Retirement Payment – Retirement Contribution |
Approved Non Contributory Plan | The gains accrued by the fund will not be subjected to income taxation. [Section 64(2) of Income Tax Act, 2058] | The employer’s contribution will not be subjected to taxation at the point of contribution. [Section 8 read with Section 23 of the Income Tax Act, 2058] | The retirement payment at the time of disbursement will be taxed at 15%. [Section 88(1) of the Income Tax Act, 2058] |
Unapproved Non Contributory Plan | The gains accrued by the fund will be subjected to income taxation. [No tax exemption provided to Unapproved Plan] | The employer’s contribution will not be subjected to taxation at the point of contribution. [Section 7 read with Section 23 of the Income Tax Act, 2058] | The retirement payment at the time of disbursement will be taxed at 15%. [Section 88(1) of the Income Tax Act, 2058] |
For the taxation part, the summary in the table above is derived from the provisions of the Income Tax Act, 2058 – rules and directives, but since the supreme court’s decision in the case of Bedbahadur vs. Rastriya Banijya Bank – the conclusion has slightly deviated. More on this topic in my other post here:
Bedbahadur vs. Rastriya Banijya Bank
Contributory and Non Contributory Retirement Plan
On the basis of the nature of benefit
Retirement funds on the basis of nature of benefit can be divided into two types: Defined Contribution Plan and Defined Benefit Plan.
In a defined contribution plan, the employer’s obligation is to contribute to the plan & actuarial and investment risk fall on the employee. Defined contribution plans are accounted for as Service Cost and Contribution Payable. In a defined benefit plan, the employer’s obligation is to provide agreed benefits & actuarial and investment risk fall on the employer. Defined benefit plans are Accounted for as Plan Asset and Plan Liability.
Para 14 of IAS 26: Accounting and Reporting by Retirement Benefit Plans: Under a defined contribution plan, the amount of a participant’s future benefits is determined by the contributions paid by the employer, the participant, or both, and the operating efficiency and investment earnings of the fund. An employer’s obligation is usually discharged by contributions to the fund. An actuary’s advice is not normally required although such advice is sometimes used to estimate future benefits that may be achievable based on present contributions and varying levels of future contributions and investment earnings. For example: the gratuity plan under Labor Act, 2048 is an example of defined benefit plan whereas the gratuity plan under Labor Act, 2074 is an example of defined contribution plan. More on this topic in my other post here: from Gratuity48 to Gratuity74: Ep01
Transitioning into SSF
General Provision
Contribution of the amount of provident fund and gratuity is governed by Section 52 and Section 53 of the Labor Act, 2074. According to the provision in the labor law, employers are required to deduct ten percent of each employee’s basic remuneration and add an equal amount to it as provident funds and add 8.33% of each employee’s basic remuneration as gratuity. This total amount is then deposited into the Social Security Fund. Section 52(1) and Section 53(1) of Labor Act, 2074.
Exceptions
For amount collected as retirement funds before 2074.05.19
After the commencement of Labor Act, 2074 – the amount for the provident fund and gratuity deposited in the retirement fund or any other similar fund established under the laws in force at the time of the commencement of Labor Act, 2074 (i.e 2074.05.19) or held in the custody of the employer shall be transferred to the SSF as prescribed after the commencement of this Act. Section 52(5) and Section 53(5) of Labor Act, 2074
For amount collected as retirement funds after 2074.05.19
Even after the commencement of the Labor Act, 2074 – (i) until the SSF has been established and become operational, or (ii) if the laws related to the SSF do not apply to a specific employer, the employer will need to deposit the such amount with the approved retirement fund or by maintaining a separate retirement fund account. Rule 22(1) and Rule 23(1) of the Labor Rules, 2075. However, such amount shall be deposited into SSF within 6 months of the enlistment of the employer in the SSF (wholly or in maximum of three installments). Rule 22(2) and Rule 22(3) of the Labor Rules, 2075.
But, how is the transfer made?
For the amounts collected in retirement funds other than SSF before 2074.05.19 or after 2074.05.19 – these are transferred to the SSF as per the provision under Section 19(4)(ka) and 19(4)(kha) of Operational Procedures for Social Security Schemes, 2075. The transfer is facilitated by the SSF from other retirement funds through coordination with employers and the retirement fund.
Even better exception: Section 19(4)(Ga) of Operational Procedures for Social Security Schemes, 2075
Section 19(4)(ga) of the Operational Procedures for Social Security Schemes, 2075 is a godsend. It provides an exception to employees who have enlisted in SSF but do not want to have their retirement contributions from the previous fund be transferred to SSF. Section 19(4)(ga) of the procedure states that if any contributor, does not wish to transfer the amount accumulated in the provident fund and other contributions in the retirement fund before the date of starting contributions to SSF, they can choose to receive the same amount or keep it in the same existing leave fund. Phew !!
Section 57 of Labor Act, 2074
Why does not the provision of Labor Act, 2074 apply for the provident fund and gratuity apply once the entity is enrolled for SSF purposes? The answer is Section 57, so Section 57 of the Labor Act, 2074 warrants a discussion. Section 57 states that when an employer or employee makes a contribution to the Social Security Fund, the laws relating to the provident fund, gratuity and insurance under the Labor Act are not compulsory. The contribution rates of the employer and employee under Section 25 of the Procedure on Operation of Social Security Schemes, 2075 are different from those under Chapter 10 of the Labor Act, 2074 – but once the contribution begins in as per the Contribution based Social Security Fund Act, 2074 – the provident fund and gratuity contribution under Labor Act is not longer applicable. More on this here in my other post: Contribution from employer and employee.
Should we worry about conflicts between SSF and CIT?
Section 52(3), 52(5), 53(3) and 53(5) of the Labor Act, 2074 requires the transfer of the accumulated retirement amount before or after the implementation of the Labor Act, 2074 to be deposited to SSF subject to the provisions in Chapter 5 (Rule 22 to Rule 26) of the Labor Rules, 2075. So the retirement amounts in other retirement funds were subjected to be transferred to the SSF even at the time of the enactment of the Labor Act, 2074. The recent amendment to the Procedure on Operation of Social Security Schemes, 2075 gave an exception where it left the decision to transfer the amount from existing retirement funds to the new social security or to receive it at the point of transition at the will of the contributor i.e. employee. So the fact that SSF left this decision to the contributor through the Procedure on Operation of Social Security Schemes, 2075 is just SSF exercising its rights to issue bylaws, directives and procedures under Section 70 of the Contribution based Social Security Fund, 2075 – nothing more. So legally it seems, CIT would not not have a position to deny the contributors transitioning to SSF from opting to receive their retirement contributions in cash (or transfer it to SSF, or leave it as is with the existing retirement funds – whatever the contributor decides).
Timeline:
1. Contribution Based Social Security Fund Act 2074 was certified and published on August 13, 2017 (2074.04.29), enforced since November 12, 2017 (2074.07.26)
2. Contribution based Social Security Fund Rules 2075 was certified and published on November 19, 2018 (2075.08.03)
3. Procedure on Operation of Social Security Schemes, 2075 was certified and published on November 22, 2018 (2075.08.06)
4. Procedure on Operation of Social Security Schemes, 2075 was First Amended on July 14, 2019 (2076.03.29) With First Amendment
5. Procedure on Operation of Social Security Schemes, 2075 was Second Amended on February 11, 2021 (2077.10.29) With Second Amendment
6. Procedure on Operation of Social Security Schemes, 2075 was Third Amended on September 21, 2022 (2079.06.05), enforced since December 21, 2022 (2079.09.06) With Third Amendment