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PF Calculation-Special Allowances Part of Basic Wages

March 8, 2019

Supreme Court Judgement on PF Contribution

Supreme Court on EPF: Good news for employees; Special allowances to be clubbed with basic salary for PF Calculation.

While 12% of the basic salary is deducted for PF from the worker, the employer makes a matching contribution.

The Supreme Court order states that special allowances will have to club with basic salary for Provident Fund(PF) calculation will bring down the take-home salary of the employees under the mandatory EPF cover.


 Supreme Court Judgement

On 28th February 2019, the two-judge bench of Justices Arun Mishra and Navin Sinha passed a verdict that "under basic wages, special allowances will consider as the conveyance, canteen, education, medical, special holidays etc and such other incentives".

Current EPF Rule

According to the current EPF rule,
  • Employees contribute 12% of their basic salary towards the PF, with employers also contributing the same amount.
  • The rest of the salary amount is added as various allowances such as special allowances, travel allowances, and house rent allowances.

Impact of the Judgement

  • As per the judgment, segregation of 'special allowance' from basic wages cannot be done for the purpose of deduction of PF.
  • This judgment will have a great impact on the companies as well as on the salary class people.

Special Allowances

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Impact on Salary

For example, if your basic salary is Rs.30,000, your PF contribution is Rs.3,600 a month at the rate of 12%, while the equal amount contributes by the employer each month.

In order to reduce the PF contribution, many employers add a special allowance component.

For example, if your employer is paying Rs.15,000 as basic pay and Rs.15,000 as special allowances, this will reduce your PF contribution to Rs.1800, which reduces the employer contribution as well.

Now after the Supreme Court Rule,

The total PF deduction will deduct from the special allowance as well. So, instead of Rs.18,00 previously, you will have to contribute Rs.3,600 towards PF.

In most places, the employer's contribution to EPF is also a part of the employee' s CTC. So, the extra Rs.1,800 of the employer's contribution will also deduct from your in-hand salary.

So overall, if you are contributing Rs.3,600 per month towards the PF(1,800 your contribution and 1,800 your employees), after this ruling, the total PF contribution will rise to Rs.7,200 (3,600 your contribution and 3,600 your employers), reducing your net pay.

How it impacts take-home pay?

Suppose, your basic wages is Rs.13,000, then 12% of your salary(Rs.1,560) deductions as PF contribution and a matching contribution of Rs.1,560 done by the employer.

But an apex court verdict, if after adding the allowances your basic wages goes up to Rs.15,000, then your PF contribution will increase to Rs.1,800 and same will pay by your employer.

Therefore, the increased deduction will reduce your take-home salary.

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