Supreme Court’s ruling on Provident Fund on February 28,2019 stated that employers can’t segregate special allowances from basic salary rather it is to be included for Provident Fund deduction under the Employees Provident Fund and Miscellaneous Provisions Act, 1952. The court held that variable earning which may vary from individual to individual according to their efficiency and diligence will stand excluded from the term “Basic Wages”. In other words payment of such special  allowance must not be common to all.

Following tests may be applied to exclude an allowance for the purpose of PF contribution:

1. The allowance /payment should be either be variable in nature or linked to any incentive for production resulting in greater output by an employee.

2. The same is not paid across the board to all employees in a particular category or is paid especially to those who avail the opportunity.

It may be noted that Basic Salary as per PF Act specifically excludes

  • Cash value of any food concession
  • Any dearness allowance ,HRA, Bonus, Commission or any other similar allowance .

Who will feel the impact?

Those earning a basic salary of more than Rs. 15000 will not be impacted by this ruling as the employer can choose to limit its contribution towards EPF to 12% of Rs. 15000 under section 26A of EPF Act for such employees.

This ruling is likely to result in windfall gains for those employees whose basic salary was below Rs. 15000 or Rs. 6500 (as applicable) in earlier years because employers may have to make good the short contribution in those years. This ruling will have retrospective impact. However there is lack of clarity since which date it shall apply. 

Therefore employers please check whether you are paying your PF dues as per the SC ruling ?

Read Supreme Court Ruling-PF is applicable on Basic salary plus all allowances except HRA: SC

The author is a practicing Chartered Accountant and can be contacted at sandeep@kcccas.com. Any comments or queries are welcome.

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One Comment

  1. Asr somayajulu says:

    If any employer not implemented is there any prosecution or advise to commissioners branch. Most of trusts are missed the fount not interested to cof epic. Then what can I do. Option letter not send.

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