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

 The legal provisions of EPS scheme

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

Case Citation – Regional Provident Fund Vs Vivekananda Vidyamandir And Others  (Supreme Court of India), Appeal Number : Civil Appeal No(s). 6221 of 2011, Date of Judgement/Order : 28/02/2019

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.

Implication of the Supreme Court Decision

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

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17 Comments

  1. Savan Gadhavi says:

    Sir,
    Can you help to calculate the PF contribition after this judgemnet

    Total cost to company – 35000/ p.m
    Basic – 7000
    HRA -7000
    Conveyance- 1600
    Flexible Allowan. 18560
    Employers PF cont. 840
    Employee PF Cont. 840

  2. Aditya says:

    for example, currently my company pays 25000/month as basic pay & another 25000/month as allowances. current Employer’s PF contribution is 12% of 25000= 3000 and same as mine contribution
    will it now change to 12% of 50000=6000?

  3. Mr. Devdatta Yagnik says:

    What is the effective date wrt. the latest sc judgement on EPF contribution ?

    Actually, Dearness Allowance is excluded for contribution to EPF purpose, as per definition of basic wages.
    Which DA ?
    If being paid as per only living index context or anyway- in the name of DA.
    Whereas DA is already being included for EPF contribution purpose.

    Thirdly,
    It seems, only hra, bonus, overtime, commission & special. Allo. – as explained in sc judgement….are to be excluded for EPF contribution, I understand. Is it so ?

    AND,
    Any other useful insight in the matter
    REQUESTED to share, please.

    With sincere regards.

    1. anisha says:

      No. In Section 2(b) of PF Law they have mentioned dearness allowance is excluded. But after that in Section 6 they have clearly mentioned that DA is a part for PF Deduction

    1. KUMARA SASTRY says:

      The judgment is effective from the date of the issuance of the notification by the respective authorities.
      further, perse, it is prospective. no retrospective effect .

  4. Astavanu Naik says:

    Well it is a welcome decision by the Supreme Court by all the Employees in the Indian who wish to increase the Retirement Corpus. We would further appreciate if the excluded allowance such as HRA would be limited to 25% of Gross Salary as Companies are providing HRA up to 50% to avoid more PF contribution. Hope any suitable decision may be implemented by the Govt or SC. Thank you.

  5. Akhil Mehra says:

    Will this decision result in adding Special Allowance to Basic Pay and DA and creation of demand of past years by EPF authorities

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