Special Allowances to be part of Basic Wages for Calculation of PF (Lower take-home for Employees drawing Basic wages less than Rs. 15000) -SC

Recent Judgment of Supreme Court on Calculation of PF Contribution

Supreme Court’s Land Mark Judgment in matter of Regional Provident Fund Commissioner (II) West Bengal Vs Vivekananda Vidyamandir and Others dated 28th February, 2019

Question raised  in Supreme Court

whether the special allowances paid by an establishment to its employees would fall within the expression “basic wages” under Section 2(b)(ii) read with Section 6 of the Act for computation of deduction towards Provident Fund.”

Conclusion drawn by Supreme Court

The Top Court under this ruling specified that  Special Allowance is part of the basic wages for computing the employees provident fund (EPF)”.

Employee Provident Fund (EPF)

Provident fund is a welfare scheme for the benefits of the employees. Under this scheme both the employee & employer contribute their part but the whole of the amount is deposited by the employer. Employer deducted the employee share from the salary of the employee. The interest earned on this investment is also credited in pf account of the employees. At the time of retirement, the accumulated amount is given to the employees, if certain conditions are satisfied.

Definition of Basic Wages

The term “basic wages” has been defined in clause (b) of section 2 of the Act as below: …“basic wages” means all emoluments which are earned by an employee while on duty or [on leave or on holidays with wages in either case] in accordance with the terms of employment and which are paid or payable in cash to him, but does not include:

Ø the cash value of any food concession;

Ø any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), house-rent allowance, 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;

Ø any presents made by the employer

Section: 6 of EPF act,1952 Contributions and matters which may be provided for in Schemes.

The contribution which shall be paid by the employer to the Fund shall be [ [ten]per cent] of

Ø basic wages, 

Ø dearness allowance and,

Ø retaining allowance (if any)] for the time being payable to each of the employees, [(whether employed by him directly or by or through a contractor)]

(And)

The employees’ contribution shall be equal to the contribution payable by the employer in respect of him and may [if any employee so desires, be an amount exceeding [ten] per cent of his

Ø basic wages,

Ø dearness allowance and

Ø retaining allowance (if any), subject to the condition that the employer shall not be under an obligation to pay any contribution over and above his contribution payable under this section:]

[Provided that in its application to any establishment or class of establish­ments which the Central Government, after making such inquiry as it deems fit, may, by notification in the Official Gazette specify, this section shall be subject to the modification that for the words “ [ten] per cent”, at both the places where they occur, the words ” [twelve] per cent” shall be substituted :]

Note:  When you analysis Above section thoroughly, you get to know that Definition  of Basic Wages intentionally exclude DA and Other Special Allowances. But for calculation of PF same is part of it.

Contribution Allocation and Calculation 

 It is mandatory for the employees who drawn a salary less than 15000 per month to became the member of EPF.

The employee who drawn a salary more than 15000per month at the time of joining is not required to make pf contribution. If they want to become the member of EPF, then they become with the consent of the Employer & Assistant PF Commissioner.

The entire 12% of your contribution goes into your EPF account along with 3.67% (out of 12%) from your employer, while the balance 8.33% from your employer’s side is diverted to your EPS (Employee’s Pension Scheme) and the balance goes into your EPF account.

[Provided that in its application to any establishment or class of establish­ments which the Central Government, after making such inquiry as it deems fit, may, by notification in the Official Gazette specify, this section shall be subject to the modification that for the words “ [ten] per cent”, at both the places where they occur, the words ” [twelve] per cent” shall be substituted :]

Basis of Conclusion

Ø The common submission on behalf of the appellants in the remaining appeals was that basic wages defined under Section 2(b) contains exceptions and will not include what would ordinarily not be earned in accordance with the terms of the contract of employment.

Ø Even with regard to the payments earned by an employee in accordance with the terms of contract of employment, the basis of inclusion in Section 6 and exclusion in Section 2(b)(ii) is that whatever is payable in all concerns and is earned by all permanent employees is included for the purpose of contribution under Section 6.

Ø But whatever is not payable by all concerns or may not be earned by all employees of a concern are excluded for the purposes of contribution.

Ø The statute itself excludes certain allowance from the term basic wages. The exclusion of dearness allowance in Section 2(b)(ii) is an exception but that exception has been corrected by including dearness allowance in Section 6 for the purpose of contribution.

Ø Principles laid down for allowances to be excluded

  • Allowances which are variable in nature;
  • Allowances which are linked to any incentive for production resulting in greater output by an employee; or
  • Allowances which are not paid across the board to all employees in a particular category; or
  • Allowance which are paid especially to those who avail the opportunity.

To exclude any incentive wage from basic wage, it should have a direct nexus and linkage with the amount of extra output. Relying on Bridge and Roof Co. (India) Ltd. vs. Union of India, (1963) 3 SCR 978, it was submitted that whatever is payable by all concerns or earned by all permanent employees had to be included in basic wage for the purpose of deduction under Section 6 of the Act. It is only such allowances not payable by all concerns or may not be earned by all employees of the concern, that would stand excluded from deduction. It is only when a worker produces beyond the base standard, what he earns would not be a basic wage but a production bonus or incentive wage which would then fall outside the purview of basic wage under Section 2(b) of the Act.

Ø The special allowance in the present case was a part of the salary breakup payable to all employees and did not have any nexus with extra output produced by the employee out of his allowance, and thus it fell within the definition of “basic wage”.

In Manipal Academy of Higher Education vs. Provident Fund Commissioner, (2008) 5 SCC 428, relying upon Bridge Roof’s case it was observed

Ø The basic principles as laid down in Bridge Roof’s case (supra) on a combined reading of Sections 2(b) and 6 are as follows:

 (a) Where the wage is universally, necessarily and ordinarily paid to all across the board such emoluments are basic wages.

(b) Where the payment is available to be specially paid to those who avail of the opportunity is not basic wages. By way of example it was held that overtime allowance, though it is generally in force in all concerns is not earned by all employees of a concern. It is also earned in accordance with the terms of the contract of employment but because it may not be earned by all employees of a concern, it is excluded from basic wages.

(c) Conversely, any payment by way of a special incentive or work is not basic wages.”

Conclusion;

Applying the aforesaid tests to the facts of the present appeals, no material has been placed by the establishments to demonstrate that the allowances(i.e. House rent allowances, City Allowances, Traveling allowances, etc.) in question being paid to its employees were either variable or were linked to any incentive for production resulting in greater output by an employee and that the allowances in question were not paid across the board to all employees in a particular category or were being paid especially to those who avail the opportunity.

From the above ruling, it can be said that special allowance or any other allowance, by whatever name called, normally paid by an establishment shall be taken into consideration for the purpose of computation of contribution towards EPF unless it is linked to individual factors as detailed supra. The test as mentioned above needs to be applied for every payment/allowance and which may not necessarily lead to a cent percent conclusion and depends on the facts and circumstances of each payment.

Impact of above:

For employees with monthly pay of less than Rs 15,000, however, inclusion of all allowances in wages for PF calculation would result in a lower take-home salary.

For employees with monthly pay of more than Rs. 15,000, Calculation of PF for Employer Contribution will be restricted to 12% of Rs. 15,000 only. So there will be no impact for such employees.

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2 Comments

  1. BALBIR SINGH says:

    If an employee has basic salary is 12000+6000 special allowances, then gross is 18000, can we deduct EPF upto 15000, or above the gross salary,

  2. Avinash Vishnu Bhadkamkar says:

    Many articles have been posted on this topic by experts. But nowhere it is mention the effective date for the same. The EPFO has also not issued any guidelines on this subject. Institutions like Bombay Chambers and Comers, National Institute of Personnel Management, Employers’ Federation of India etc have also neither sent any information nor arranged seminars so far. All in HR are confused.

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