News Analysis

Earning less than ₹15,000/month? SC ruling on PF contribution may dent your take-home pay

Satya Sontanam BL Research Bureau | Updated on March 03, 2019 Published on March 03, 2019

Inclusion of all allowances in wages for PF calculation, a mixed blessing: experts

Employees whose monthly pay is less than ₹15,000 may have to brace for a lower take-home salary, going by the recent Supreme Court judgment on the sums to be considered for provident fund (PF) contribution. Monthly pay here comprises basic wages, dearness allowance, cash value of food concession and retaining allowance, if any.

The Supreme Court has recently ruled that almost all allowances (except HRA) should be considered when calculating the PF contribution by both employers and employees.

However, by taking away more towards long-term savings, the judgment helps in boosting the retirement kitty of such employees.

As per the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, both employer and employee have to mandatorily contribute 12 per cent of the monthly pay towards provident fund, if the monthly pay do not exceed ₹15,000. PF contribution in cases where monthly pay is more than ₹15,000 is only voluntary, although many employers and employees continue their contributions even beyond the limit.

So far, the definition of basic wages has been a contentious issue. As per law, basic wages includes all payments excluding DA, House Rent Allowance (HRA), overtime allowance, bonus, commission and any gifts made by the employer.

But over the years, the Employees’ Provident Fund Organisation has contended that employers provide various allowances such as special allowance, conveyance allowance, canteen allowance, education allowance and medical allowance, which are in the nature of basic wages but are shown separately to avoid contribution to the PF account. The latest judgment seeks to address this issue.

Addressing the gap

As per SC’s judgment on February 28, basic wages include components of salary that are universally, necessarily and ordinarily paid to all across the board. That is, an allowance goes beyond basic wages if it can be shown that the workman concerned had become eligible to get the extra amount for doing beyond the normal work which he was otherwise required to put in.

If the employer is able to prove that the allowance so provided to certain employees is not common or linked to his/her performance, that allowance will not become part of basic wages. Therefore, the order implies that the allowances discussed above now becomes part of the basic wages and the PF should be deducted on the total sum of the basic pay, including these allowances and the DA.

The implication

If your monthly pay is more than ₹15,000, this judgment may not be binding. Kuldip Kumar, Partner at PwC India, says, “As per an SC order in the Marathwada Gramin Bank case, employers cannot be compelled to contribute beyond their statutory liability unless they voluntarily agree to contribute PF on the wages higher than ₹15,000 per month.”

If your monthly pay is less than ₹15,000, as almost all allowances now come under the definition of basic wages, there could be higher deduction of PF. This will reduce your take-home salary. But the good news is that the contribution (both employer and employee) to your retirement fund goes up.

Experts though are divided on whether the changed definition of basic wages will be applicable only for PF contribution or will also apply to the calculation of the ₹15,000 ceiling.

Chirag Nangia, Director, Nangia Advisors, says that it will help if the employers keep a simple compensation structure clearly defining ‘basic wages’ to avoid litigations on this front.

Published on March 03, 2019
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