The government is outsourcing the IT development for the universal credit welfare programme to India despite promises to keep large data projects in the UK.
About 500 workers in Bangalore and Mumbai are being hired by the outsourcing firms Accenture and IBM to help design and maintain a delivery system for universal credit, according to the Guardian.
The Department for Work and Pensions (DWP) signed contracts in December with IBM and Accenture worth £525m each, the paper said.
The news comes just a week after it was revealed that the UK government has agreed to allow IBM to provide access to the personal data of the UK's 43 million drivers in an Indian datacentre to cut costs.
IBM, which runs London's congestion charge system, lobbied Transport for London (TfL) to allow the move to improve the profitability of the £60m contract it took over from Capita in 2009.
The disclosures appear to contradict assurances from the employment minister, Chris Grayling who, in November, told parliament: "We have a policy to control contracted work being offshored. Our suppliers are required to seek approval before they offshore any contracted work. Those approvals are predicated on their meeting stringent guidelines.
"I should also say that, as a team of ministers, we have indicated very clearly to our suppliers that we will not countenance seeing existing UK employment offshored."
Responding to the revelation, Public and Commercial Services (PCS) union general secretary Mark Serwotka said: "With unemployment high and still rising, ministers should be taking every opportunity to create skilled jobs, yet it appears plans are already well advanced to offshore the development of what is supposedly their flagship benefits system.
"This not only raises questions about the government's commitment to getting our economy moving again, but also about the pledge the employment minister made to parliament."
The Guardian quotes Labour MP John McDonnell as saying the development raised difficult questions about the security of data.
"This flies in the face of firm government undertakings that databases holding the personal information of our citizens would not be put at risk by offshoring," McDonnell said.
"By allowing private companies to maximise their profits in this way risks large-scale fraud, undermining the credibility of the whole system."
Universal credit, drawn up by work secretary Iain Duncan Smith, is to be introduced next year. The government says it aims to simplify benefits by merging income-related jobseeker's allowance, housing benefit, child tax credit, working tax credit, income support and income-related employment support allowance into a single payment.
The IT system aims to be the first major government service to be digital by default, and is supposed to include voice recognition technology.