Basic Salary, Special Allowances Must Be Combined To Calculate PF: SC

New Delhi: The Supreme Court on Thursday has ruled that employers cannot segregate ‘special allowance’ from basic wages while calculating provident fund deduction from employees and their matching contribution.

What this essentially means is that the EPF contribution will be on the total amount including all the allowances paid to an employee and not just on the basic salary.

How will the ruling affect the employees:

The impact of such a decision could be two-fold. One, the contribution towards EPF will be on a higher amount and hence less take-home pay for the employee as the allowances will also be clubbed with the basic wages. And, secondly, the retirement benefit will see more inflows as higher monthly PF contribution will move into the employee’s PF account.

Currently, as per the salary structure, the employees are supposed to contribute the mandatory 12 per cent of their Basic Salary or Wage ( 10 per cent for certain establishments) towards their PF. The other emoluments are shown as different allowances such as house rent allowance, special allowance etc. even though they form a part of the total salary or cost to the company.

Presenting a judgment related to EPFO and certain establishments, the Court has ruled out that the allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution accordingly to the provident fund account of the employees.

Times of India quoted a former PF commissioner as saying the Supreme Court ruling is unlikely to impact those with basic salary and special allowances above Rs 15000 a month.

In its judgement, the top court said “The wage structure and the components of the salary have been examined on facts, both by the authority and the appellate authority under the PF Act, which have arrived at a factual conclusion that allowances in question were essentially a part of the basic wages camouflaged as part of an allowance so as to avoid deduction and contribution accordingly to the PF account of the employees”.