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Employees to get lesser take-home salary: Know if you are impacted by SC verdict on EPF

Renu Yadav     March 6, 2019

Most of the salaried people contribute around 12 per cent of their monthly wages to the employees provident fund (EPF) and a matching contribution is made by the employer. But it is possible that soon you may be contributing more towards your EPF. Last week, Supreme court in a ruling said that employer will have to include all the fixed allowances such as special allowances, conveyance allowance, medical allowance, etc. while calculating the PF contribution. Right now, only basic wages plus dearness allowances are considered for calculating EPF contribution. As most of the private sector employees don't get dearness allowance, only basic wage is considered.

As more and more allowances will be included in the calculation of basic wages, the PF contribution will go up but will automatically lead to reduction in take-home salary.

The Ruling

The Supreme court has basically reiterated that any allowance which is paid universally to the employees and has not been earned with respect to overtime or increased productivity should be included in the calculation of EPF.

"The Supreme Court in the recent judgment of Vivekanand Vidya Mandir has reiterated the old test to determine whether any payment would be part of basic wages or not and applying the settled ratio or principal has held that any payment by the name of special allowance paid to all the employees universally shall be part of basic wages for the purposes of the EPF Act," says Punit Dutt Tyagi, Executive Partner, Lakshmikumaran & Sridharan.

The rationale for conclusion is that such allowances are neither variable nor linked to productivity and hence do not merit an exclusion.  "The SC has indicated that for an amount to be considered as beyond basic wages, it has to be shown that the workman concerned had become eligible to get this extra amount beyond the normal work which he was otherwise required to put in," says Saraswathi Kasturirangan, Partner Deloitte India.

Also read: EPF or NPS, which one is a better retirement saving option for you

So, now if the employer wants to continue paying special allowances he will have to link it to the productivity of the employee.

"In the event an employer wants to give any special allowance or emolument as an incentive to its employees, then such employer needs to ensure that it is not paid universally to all employees. It must ensure that the payment is linked to the productivity and is paid as production bonus or incentive," Punit Dutt Tyagi, Executive Partner, Lakshmikumaran & Sridharan

Your take-home salary will go down

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

But as per the 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 be paid by your employer. Therefore, the increased deduction will reduce your take-home salary.

Who will be impacted?

It is mandatory for an organisation employing more than 20 people to register with EPFO. While contributing towards EPF is mandatory for those earning basic wages of up to Rs 15,000. Those earning basic wages more than 15000 per month, EPF contribution is not mandatory.

Also, the employer can choose to limit its contribution towards EPF to 12 per cent of Rs 15,000 (Rs 1,800) under Section 26A of EPF act for those employees earning more than Rs 15,000 per month as basic wages.

Therefore, those who are earning a basic salary of more than Rs 15,000 will not be impacted by this ruling.

"Domestic workers with basic salary exceeding Rs. 15,000 per month may not get impacted due to this ruling--where Provident Fund contributions are made by the employer on full basic salary or on minimum Rs. 15,000 per month. Such domestic workers may be covered under the provision of Para 26A of the Provident Fund Scheme. However, the Supreme Court has not dealt on this aspect in its ruling," says Puneet Gupta, Tax Director, People Advisory Services, EY India.

Also, foreign workers are also not exempted under section 26A, therefore they also may have to contribute more towards PF.

"Further, foreign nationals who are required to be treated as international workers would also have a higher PF contribution since the wage ceiling of Rs. 15000 per month is not applicable to them. Where companies are required to retrospectively pay on higher wages, it would result in a windfall gain for the foreign nationals at the cost of the company and is certainly discriminatory," says Saraswathi Kasturirangan, Partner Deloitte India.

Also read: EPFO shrinks job creation numbers that Centre swears by from 79 lakh in 14 months to just 72.32 lakh in 16 months

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