Analysis of recent decision of Supreme Court on Employee Provident Fund Contribution
Recent decision of the Supreme Court has tried to settle the long drawn litigation about the allowances which need to be considered for the purpose of contribution under the Employee Provident Fund Scheme. Let us discuss the law and the implications of the Supreme Court decision
In order to help salaried people accumulate for their some specific needs in general and for retirement in particular, the Employee Provident Fund scheme is applicable to every employer which employs more than twenty employee/worker. Under the scheme the employer is required to deduct 12@ of the basic salary and dearness allowance from the salary of the employee with an own equal contribution.
This is mandatorily applicable to all the employees whose monthly pay does not exceed fifteen thousands. For the purpose of considering the threshold limit of fifteen thousands the amount of basic pay and dearness allowances are to be taken into account. For the employees whose salary exceeds the threshold limit, they have an option to opt out of the scheme at the time of joining such establishment. Once the employee joins in the scheme, he has to stay under the scheme as long as he is working with the present employer. For employees drawing more than fifteen thousand monthly salary, the employer has the option to deduct and contribute @ 12% on the base amount of fifteen thousand or alternatively the employer can consider the entire amount of basic salary and dearness allowance for this purpose.
Since majority of the employees perceive “in hand cash salary” only as salary, the provident fund deductions/contributions are not perceived as part of the salary. So in order to ensure maximum amount as “in hand salary” many of the employers pay the employees in the form of various allowances. Such allowances take the forms of canteen allowance. Conveyance allowance, lunch allowance, House Rent Allowance, special allowance etc. . The Scheme itself excludes cash value of food concession as well as HRA for PF deduction.
Supreme Court Decision
There is no dispute as regards the basic salary but amount of allowances which the employer should take into account for the purpose of calculating the 12% has always been a subject matter of litigation. The same is set to rest by a Supreme Court decision delivered on 28th February 2019. The Supreme Court while dealing with various petitions and appeals considered the legal provisions, the purpose of the legislation on provident fund and some of its earlier decisions. After considering all the above, Supreme Court has laid down a universal law as regards the allowances which will have to be considered for PF deduction. The Supreme Court has applied the “rule of universality” to the allowances. If a particular allowance is universally paid by various employers or is paid to all the employees of an establishment without any reference to the quantum of efforts put in by such employee or the quantum of the output, the same takes the form of salary/dearness allowance and needs to be included for the purpose of determining the quantum of PF deduction. So overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment shall stand excluded. Likewise any variable earning which may vary between individual according to their efficiency and diligence will stand excluded from the term “basic wages”.
So court held that any allowance which are essentially a part of the basic wage but camouflaged as an allowance to avoid deduction and contribution has to be treated as basic salary or dearness allowance for the purpose of deduction for provident fund contribution.
The Supreme Court Decision will have wider implications depending on individual situation. For the employees in the lower scale of emoluments where amount considered for PF contribution is lower than fifteen thousands and who receive such universal allowance, not linked to efficiently, will get lower “in hand salary” as the employer is bound to take into account such allowances while deducting provident contributions. The employer himself will have to shell out more money in the form of employer’s contribution. Such employees will be able to accumulate larger corpus in their provident fund account at the time of their retirement.
For employees who are in receipt of higher salary with allowances but the contribution has been pegged at the base amount of fifteen thousand will not be affected by this supreme court decision. However for the employees in higher salary bracket and whose contribution is computed with reference to such higher amount of salary, the contribution toward provident fund will go up if they are in receipt of such allowance and which are not considered hitherto for PF contribution.
So in case your Cost to the Company (CTC) includes the employer’s contribution as well and the amount of contribution is going to go up due to Supreme Court Decision as discussed, your salary in hand will reduce due to increase in deduction from your Salary as well as your salary coming down to make for increased quantum of employer’s contribution.
Writer is a tax and investment expert and can be reached at Jainbalwant@gmail.com and @jainbalwant on twitter