- Date : 08/03/2019
- Read: 4 mins
Supreme Court’s ruling on PF deductions is not likely to hit above the statutory limit. The cause and implication of this landmark verdict.
The Supreme Court (SC) has recently redefined the meaning of “basic salary” for Provident Fund (PF) contribution purposes. This will alter the calculations of PF contributions of both employers as well as employees. However, it will not impact the PF contribution of those earning over Rs. 15,000 as basic salary and allowances. The SC ruling is applicable for salaries up to Rs. 15,000 only, beyond which the inclusion of any other allowances for calculating PF is not mandatory.
With the ruling, the ‘take home’ salary of the employee will reduce as the employee PF contribution will inevitably increase. As for the effect of the ruling on salaries above Rs. 15,000 is concerned, one must recall the SC verdict in the Marathwada Gramin Bank employees versus the management case, which said that PF authorities cannot force the employer to contribute beyond the statutory liability. The PF authorities have accordingly taken a stand of not forcing employers to contribute over and above the statutory limit of Rs. 15,000 a month.
The rationale used to redefine the calculation method of PF contribution was to test whether the salary or any part thereof was fixed or variable. A particular allowance would, therefore, become a part of the salary for PF purposes, if it is disbursed to all the employees or a class of employees. Inversely, it would not include an allowance which is of variable nature and/or is given as an incentive to some employees.
What does the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 say with regard to PF deductions?
As per the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, the employer as well as the employee must contribute 12% of their monthly salary towards PF, if the monthly salary of the employee is below Rs. 15,000. Monthly salary for this purpose meant basic wages. Although compulsory only for employees earning below Rs. 15,000, employers of employees earning more than the limit can also voluntarily contribute towards PF, along with their employees.
What was the question posed to the SC and why?
The Employees’ Provident Fund Organisation was not happy with the definition of monthly salary for PF deduction and sought to know from the SC, what components should be included in the monthly payment.
The organisation had observed that employers would provide allowances in various names like special allowance, conveyance allowance, canteen allowance, education allowance, medical allowance to break down the monthly salary into various components, thus reducing the basic wages. This subsequently reduced the PF contribution of the employer as well as the employee.
How did the PF calculation change as a result of the ruling?
In case of an employee with a monthly pay of Rs. 10,000, the PF deduction would be Rs. 1,200 at 12%. An equal contribution would come from the employer as well, thus the total contribution being Rs. 2,400. Rs. 10,000 could include Rs. 6,000 as basic pay, Rs. 2,000 as special allowance and Rs. 1,000 each as conveyance allowance and canteen allowance.
In the scene before the SC ruling, the employer would consider only the basic pay of Rs. 6,000 for calculating PF contribution. Accordingly, the equal contribution of the employee and the employer was Rs. 720 only. This reduced the post-retirement benefit of the employee by an amount of Rs. 960 per month.
What type of allowances will not be included in salary for PF calculations?
Any allowance or a component of the salary will not be included for PF calculation, if it is not a part of the normal pay of the employee. In other words, the employer must be able to prove that the allowance is not paid to all the employees or to all employees of a particular criterion/category. It will also not be considered for PF calculations if it is apparent that the portion is specifically linked to the performance of the employee. Read more on how does a lower EPF contribution impact your retirement savings?
The Supreme Court (SC) has recently redefined the meaning of “basic salary” for Provident Fund (PF) contribution purposes. This will alter the calculations of PF contributions of both employers as well as employees. However, it will not impact the PF contribution of those earning over Rs. 15,000 as basic salary and allowances. The SC ruling is applicable for salaries up to Rs. 15,000 only, beyond which the inclusion of any other allowances for calculating PF is not mandatory.
With the ruling, the ‘take home’ salary of the employee will reduce as the employee PF contribution will inevitably increase. As for the effect of the ruling on salaries above Rs. 15,000 is concerned, one must recall the SC verdict in the Marathwada Gramin Bank employees versus the management case, which said that PF authorities cannot force the employer to contribute beyond the statutory liability. The PF authorities have accordingly taken a stand of not forcing employers to contribute over and above the statutory limit of Rs. 15,000 a month.
The rationale used to redefine the calculation method of PF contribution was to test whether the salary or any part thereof was fixed or variable. A particular allowance would, therefore, become a part of the salary for PF purposes, if it is disbursed to all the employees or a class of employees. Inversely, it would not include an allowance which is of variable nature and/or is given as an incentive to some employees.
What does the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 say with regard to PF deductions?
As per the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, the employer as well as the employee must contribute 12% of their monthly salary towards PF, if the monthly salary of the employee is below Rs. 15,000. Monthly salary for this purpose meant basic wages. Although compulsory only for employees earning below Rs. 15,000, employers of employees earning more than the limit can also voluntarily contribute towards PF, along with their employees.
What was the question posed to the SC and why?
The Employees’ Provident Fund Organisation was not happy with the definition of monthly salary for PF deduction and sought to know from the SC, what components should be included in the monthly payment.
The organisation had observed that employers would provide allowances in various names like special allowance, conveyance allowance, canteen allowance, education allowance, medical allowance to break down the monthly salary into various components, thus reducing the basic wages. This subsequently reduced the PF contribution of the employer as well as the employee.
How did the PF calculation change as a result of the ruling?
In case of an employee with a monthly pay of Rs. 10,000, the PF deduction would be Rs. 1,200 at 12%. An equal contribution would come from the employer as well, thus the total contribution being Rs. 2,400. Rs. 10,000 could include Rs. 6,000 as basic pay, Rs. 2,000 as special allowance and Rs. 1,000 each as conveyance allowance and canteen allowance.
In the scene before the SC ruling, the employer would consider only the basic pay of Rs. 6,000 for calculating PF contribution. Accordingly, the equal contribution of the employee and the employer was Rs. 720 only. This reduced the post-retirement benefit of the employee by an amount of Rs. 960 per month.
What type of allowances will not be included in salary for PF calculations?
Any allowance or a component of the salary will not be included for PF calculation, if it is not a part of the normal pay of the employee. In other words, the employer must be able to prove that the allowance is not paid to all the employees or to all employees of a particular criterion/category. It will also not be considered for PF calculations if it is apparent that the portion is specifically linked to the performance of the employee. Read more on how does a lower EPF contribution impact your retirement savings?
