The apex court has ruled that employers cannot segregate 'special allowance' from basic wages for purpose of PF deductions. The Supreme Court has passed an order on Provident Fund (PF) calculation that will have far-reaching impact on companies and the salaried class.
A bench of Justices Arun Mishra and Naveen Sinha yesterday ruled that employers cannot segregate 'special allowance' from basic wages for purpose of PF deductions.
The court was hearing a clutch of appeals questioning 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".
Note that employers and employees both contribute 12% of wages in EPF. Under Section 2 (b), basic wages refers to all emoluments earned by an employee in accordance with the terms of his/her employment contract but does not include the following:
i) The cash value of any food concession
ii) Any dearness allowance, house rent allowance, overtime allowance, bonus, commission, or any other similar allowance payable to the employee
iii) Any presents made by the employer
What the court said
The apex court, however, noted that basic wages included Dearness Allowance for the purposes of PF calculation. Furthermore, it pointed out that the appealing establishments have not submitted any proof to demonstrate that the special allowances being given to their employees "were either variable or linked to any incentive for production" with visible results. "In order that the amount goes beyond the basic wages, it has to be shown that the workman concerned had become eligible to get this extra amount beyond the normal work he was otherwise required to put in," read the order.
Moreover, there was no supporting material that the allowance 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". Hence, the court ruled 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" and dismissed the appeals. "Conversely, for the same reason the appeal preferred by the Regional Provident Fund Commissioner deserves to be allowed," it added.
What this means
The Supreme Court judgment will translate to a higher deduction for PF, which is good in terms of building the nest egg, but not so much for your current lifestyle since it means a lower take-home salary. But not everyone will be impacted by this development. "The order will be applicable to those with a basic salary and allowances up to Rs 15,000 as PF contribution. Beyond that, PF is not mandatory," a former central provident fund commissioner (CPFC) told The Times of India. The court ruling could also result in a higher outgo in case of foreigners working in India.