The Supreme Court has ruled that employers must take special allowances into account while calculating their contribution to an employee’s provident fund (PF). Such allowances will be a part of the total emoluments given to an employee and, therefore, the 12% EPF contribution should be calculated on this total amount. This ruling may impact your in-hand salary, especially if your basic salary is below Rs 15,000/month.
This SC judgement is possibly one of the most keenly awaited labour law rulings. The court has finally clarified the position and in a way resolved the confusion that was there with respect to PF contribution on employees’ wages.
The SC has concluded that “the allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution accordingly to the provident fund account of the employees.”
What it means
According to current EPF rules, employees contribute a 12% of their basic salary towards the provident fund, with employers also contributing the same 12% amount. The rest of the salary amount is added as various allowances such as special allowances, travel allowances and house rent allowance. Employers were reducing their PF contribution by using just the basic salary. By including the special allowances, theoretically, the PF contribution from employers would have to go up.
The SC ruling on the PF deductions may have financial implications for businesses and employees. Overall, this is aimed at ensuring that everyone has a sizeable amount in their pension fund at the time of retirement. The ruling changes the way the PF contribution by the employer and the corresponding matching contribution by the employee is calculated.
The calculation would now involve the basic salary, dearness allowance (DA), and special allowances instead of only the basic. Adhil Shetty, CEO, BankBazaar.com, says that if your basic is Rs 10,000 and your special allowance is Rs 5000, then your employer PF contribution and your matching contribution will go up from Rs 1200 (12% of 10,000) to Rs 1800 (12% of 15,000). This is why there could be a reduction in your take-home salary.
But there is a catch. The option to cap employer PF contribution at Rs 1,800 continues to remains. “So, if your basic is above Rs 15,000 and your employer deducts a flat Rs 1,800 as PF contribution, then this ruling is unlikely to impact you. However, if your employer deducts 12% of your basic and DA instead of the flat Rs 1,800, then you may see a reduction in your take-home salaries as the new computation would be 12% of basic + DA + special allowance,” points out Shetty.
At the moment, many employers use the special allowances to reduce their PF contribution. For instance, if your basic salary is Rs 30,000, then your PF contribution will be Rs 3,600 a month at the rate of 12%. An equal amount has to be contributed by the employer each month. But in order to reduce the PF contribution, many employers add the ‘special allowance’ component by paying Rs 15,000 as basic pay and Rs 15,000 as special allowances. In this way, employers reduced their PF contribution to Rs 1800 (12% of Rs 15,000) and this reduces the employer contribution as well.
“The SC has finally clarified the legal position on whether an allowance paid to employees as part of the total salary, base salary or cost-to-company, would be subjected to PF contributions. As a result, employers may need to review their existing compensation structure and determine any increased PF liabilities for domestic employees as well as their international workers (expats) in India. For domestic employees (including contract labourers), the employer’s liability to make PF contributions would not extend beyond the current limit of 12% of Rs 15,000 (until such time the limit is increased), although this monetary limit does not apply to international workers and hence the risks for that category may be higher,” wrote Archita Mohapatra & Vikram Shroff of Nishith Desai Associates in a post.
“On a practical note, the PF authorities, who are now armed with this SC decision, are likely to increase their inspections and audits in order to recover the additional PF contributions along with interest and damages for delayed contribution. The action would most likely be retrospective given that the EPF Act does not provide for a limitation period. Overall, this SC judgement is likely to increase the employees’ PF contributions, which in turn would decrease their current take-home pay but eventually increase their retirement savings. For employers, the cost of doing business in India will be higher,” added the experts from Nishith Desai Associates.
Do remember there is no clarity on whether the SC ruling will be applied retrospectively.