The EPF deduction could be on basic salary less then minimum wages while the total take home salary should be more than minimum wages including the other allowance.
You are also correct that you may not decrease the allowances but you may increase it to correct/to implement a new fitments.
5th July 2011 From India, Pune
You have an option without making any modification in allowances, just pay EPF contribution on Rs.6500(ceiling as per EPFAct) i.e Rs 780, on employer and employee side both.
5th July 2011 From India, Pune
Have you gone through the directions of the EPF Deptt. I am attaching the same for your ready reference. Please go through the same and then answer my query. If you have already read it then kindly tell me that do you still stick with your answer. I need some more replies and guidance. Thanks and regards.
5th July 2011 From India, Mumbai
Its not that my company is not willing to pay the basic equivalent to minimum wages. Infact we are paying more than that. The only question is that can we raise basic by decreasing/merging any other allowance in basic or we have to increase the basic without touching any allowance. By doing this we are going to raise the pocket of the employee twice in two months because only last month we have given them the annual increments.
As far as your suggestion regarding the deposit Rs-780 on the ceiling of Rs-6500, in that case, without touching the allowances, I would prefer to deposit the EPF on the minimum wages and not on the maximum ceiling . Kindly understand my question and then apply. Regards
5th July 2011 From India, Mumbai
5th July 2011 From India, Pune
your views appear correct in this instance. the easiest way for your company to change this without incurring major additional costs is to outsource the people to an agency like Manpasand Manpower. this way whatever changes you want to make in th structure can easily be done without you reducing allowances while they are on your pay roll.
5th July 2011 From United States, Los Angeles
we have also faced the same issue in company for the Minimum wages not only for Karnataka but for all locations across India.
i agree with other comments that you can add up other allowance to B+DA component as the other components are only tax savings/ exemption componets.
But Please understand one thing if you increase the B+DA then automatically employees take home will be reduced as we calculate the PF Ee & Er contribution on the same.
So as a part of market/ statutory correction you can always communicate/convince your management with the concern of your finance team (Might be CFO or any senior person in change in finance) to understand the feasibility of financial status of the company for the better understanding and proposal for the management.
I have done the same comparison study with the existing pay/CTC structure and new pay/ CTC structure according to the Minimum wages among the group of companies and proposed the same for difference to be invested from the management as a part of statutory correction.
The management will definitely be happy to learn the same and also to avoid the trouble from the statutory bodies.
I was successful in implementing the same among the group of companies.
Hope you can also do the same and wish you good luck for this assignment.
For any clarification get in touch with me
6th July 2011 From India, Bangalore
Kindly comment with relevant laws / rulings
6th July 2011 From India, Gurgaon
The question raised by you in one of your previous posts is "The only question is that can we raise basic by decreasing/merging any other allowance in basic or we have to increase the basic without touching any allowance." An answer to this question has to be found with reference to the provisions of Section 9A of the Industrial Disputes Act 1947 also. According to this section any change in the conditions of service mentioned in the Fourth Schedule to the Industrial Disputes Act and applicable to workmen can be done only after giving them 21 days notice as contemplated by the Section. Item 1 in this Schedule relates to wages and item 3 in the schedule relates to compensatory and other allowances. Therefore if you decide to make a downward revision of either the basic wage or any other allowances in respect of your employees who are workmen as defined under the Industrial Disputes Act you have to follow the procedure prescribed under section 9A of that Act.
6th July 2011 From India, Madras
Section 12 says "No employer to which PF Act applies shall by reason only of his liability for the payment of any contribution to the Fund reduce whether directly or indirectly the wages of any employee"
6th July 2011 From India, Pune
U can pass ammendmet in compensation policy for merging allowance or re-arrange in salary structure but do't try to reduce basic, u can increase it and any allowance may decrease in % and common for all for the specific category.
---------Even I'm satisfied with deepak; u can conduct such comparision.
6th July 2011 From India, Gurgaon
we have inspected our company in 1/6/09 and covered from this date but on contribution started after join a person getting less then 6500 on 1/7/10 befor that nobody was getting less the prescribed limit. now inspector is to deposit cont. from coverage date. what we should pl. clearify asap
6th July 2011 From India, Pune
Should social security contributions be based on minimum wages?
The Employees Provident Fund Organisation of India (“EPFO”), which manages India’s largest
social security fund for employees, has recently clarified to its officers that employers are
required to make provident fund (“PF”) contributions on the minimum wages.
The EPFO has issued an inter-department clarification on May 23, 2011 (“Clarification”)
indicating that splitting of minimum wages for the purposes of PF contributions is not
permissible. This Clarification, which has been issued in view of the lack of a uniform approach
followed by the PF authorities in different states, seems to be an attempt by the labour
department to settle the ongoing ambiguity with respect to the calculation of provident fund
According to the extant provisions of law, to the extent the Employees Provident Fund and
Miscellaneous Provisions Act, 1952 (“EPF Act”) applies to an establishment, the employer is
required to make PF contributions for its eligible employees (whether employed directly or
through a contractor) on the amount of basic wages (base salary), dearness allowance (which is
like a cash allowance paid to an employee on account of inflation) and retaining allowance.
While the EPF Act defines ‘basic wages’, it does not stipulate that basic wages need to be
equivalent to the minimum wages under the Minimum Wages Act, 1948 (“MWA”). Further, it is
a common practice to structure the compensation package to include several allowances and
perquisites, some of which provide tax benefits. As a result, for employees drawing minimum
wages, the basic wages would typically be an amount lower than the minimum wage rates
prescribed by the government under the MWA. This would therefore reduce the PF and pension
contributions by the employer as they are linked to the amount of basic wages.
The Clarification states that the minimum wage is the lowest permitted wage legally required to
be paid by an employer to its worker and therefore ‘basic wages’ (for the purpose of PF
calculation) should not be lower than the minimum wage (under the MWA). As per the
Clarification, employers who do not pay minimum wages to their employees but claim to pay
certain additional allowances to them, may be liable for punishment under the EPF Act as well as
under the Indian Penal Code. Further, the Clarification also states that any employment contract
between the employer and the employee which contains a stipulation to the effect that the
minimum wages paid or payable to an employee is bifurcated to reduce the liability of the
employer under the EPF Act shall be treated as void ab initio. Since the minimum wage is
calculated by the state governments after due consideration of the prevailing market conditions
and other prescribed factors, splitting, segregation or re-classification of the minimum wage
should not be permissible.
The Clarification places reliance1 on the judgment of the Division Bench of the Karnataka High
Court, in the case of M/s Group 4 Securities Guarding Ltd., Bangalore Vs. Regional Provident
Fund Commissioner and Others2 (reported as 2004 LIC, Page 2075), which specifies that the PF
Commissioner may exercise his powers to enquire whether the wages fixed are a subterfuge to
avoid its contribution to the PF. The court took the view in that case that employers splitting up
basic wages under several heads and allowances would amount to a subterfuge to avoid PF
contribution. However, it is pertinent to note that while the MWA provides for a definition of
wages, it does not contain a definition of basic wages.
The Clarification seems to be in the interest of the employee community in general, since it is
intended to ensure that the employer makes a certain level of PF contributions for its eligible
employees and provide necessary social security. The contributions would help ensure adequate
amounts in the employees’ provident fund account and provide sufficient pension benefits to
the employees and their family members. The Clarification should help curb the malpractices
adopted by some employers who make a very low amount of PF contribution as a result of the
low basic salary, which also affects the benefits under certain other labour laws where the
benefits are linked to the basic salary.
However, the stand taken by the EPFO and the position stated in the Clarification, does not
appear to be consistent with law and may be tested in a court of law, leading to more litigation
on this issue. This is in view of some of the points as mentioned below:
a. The EPF Act, being a standalone law, does not prescribe that the basic wages should be
equal to the minimum wages. Moreover, if that was indeed the intention of the legislature,
instead of providing a separate definition of basic wages under the EPF Act, it would have
cross referred to the definition of wages under the MWA, since the EPF Act was enacted
much after enactment of the MWA.
b. The EPF Act is silent on the issue with regard to the percentage of the salary that may be
deemed to be basic wages. As a matter of fact, there is no statute in India that prescribes the
percentage of basic wages and/or of any allowance. Accordingly, an employer can under the
employment contract indicate the amount of basic wages (besides the other allowances)
that shall be payable, as long as the employer ensures that the employee receives at least
the minimum amount of wages as prescribed under the MWA.
c. The MWA does not contain a separate definition of basic wages. Infact, while the
definition of wages under the MWA includes House Rent Allowance (“HRA”), the definition
of basic wages under EPF Act specifically excludes HRA - therefore there does not appear to
be any co-relation between ‘wages’ under the MWA and ‘basic wages’ under the EPF Act.
d. The latest judgement on this subject, being that on the Punjab and Haryana High Court in
the case of Assistant Provident Fund Commissioner, Gurgaon vs. G4S Security Services
(India) Ltd & Anr. (2011 LLR 316 (P&H HC) has permitted the employer to split the
minimum wages for the purposes of PF contributions. Unless another court decision in the
future overturns this judgement, this judgement shall continue to be the law on this
subject. This judgement also makes necessary references to some of the earlier judgments
as have been referred in the Clarification. It is surprising to note that this judgment has not
been referred to in the Clarification.
Unless there is a further clarity issued by the EPFO on this issue or unless this matter is settled by
the courts, this Clarification is likely to lead to more labour law litigation in India since the PF
authorities, relying on the Clarification, are likely to take an aggressive stand.
1 The Clarification refers to the following judgments: (i) the RPFC, Punjab vs. Shibu Metal Works
1965 (1) LLJ 473, (ii) Crown Aluminum Works vs. Workers Union (1958) Vol. I LLJ, Page 1, (iii)
Unichoyi vs. State of Kerala (1961 Vol.I Page 631), (iv) Kamani Metals & Allys Ltd. vs. Their Work
Men (1967 Vol. II-55.
2 The Appellant Company had bifurcated the wages into several allowances and that the basic
pay component was a fraction of the statutory minimum wage stipulated.
6th July 2011 From India, Surat
HR manager means to handled Human Resource related problems, it is related to Manpower, joining, retentions plan, motivational activities, benefits of the employees, such as ESIC, EPF, Gratuity, Bonus, Leaves, Variable pay, Salary grievances, many more...
6th July 2011 From India, Delhi
Thanks for your inputs. Could you kindly suggest as to what prevent me keeping basic at Rs. 6600/- where total salary is Rs. 7000/-. Essence is that I am paying far above the Minimum Wages and the prescribed limit of 6500 for providing option to employee, it is not saving PF, rather utilising the minimum prescribed limit while allowing the employee to manage his finance on his own, otherwise there is no use of providing option to employees with basic above 6500/- to contribute for PF or not.
Now the question are-
1. If there is any regulation which mandate any minimum % of gross salary to be the basic salary ?
2. Is it necessary to split the salary in heads like Basic, DA, HRA, Conv, LTA...etc ?
3. If any law prevent paying consolidated salary which is above the minimum prescribed limits ?
Would appreciate comments with relevant regulations.
9th July 2011 From India, Gurgaon
there are no explicit laws that govern this area. only people's deductions from what they read. the only point that has some clarity, that too only after the PF department has taken up cases against some large establishments, is that basic salary should not be less than the state minimum wages.
now this causes some additional confusion in the sense that in many states, minimum wages is already accounted for as Basic + (V)DA. can you then add another DA on top of this - is this also PF able?
in terms of allowances you can pay whatever you want - call it dancing allowance, or uniform washing allowance or haircut allowance - if you pay it each month, the PF/ESI inspectors will want you to deposit money against it. there are some allowances like CCA and Washing Allowance that dont attract PF as on date - but these keep changing
all in all there is very little clarity on these issues. the labour department says one thing, the factory inspector another, the PF people a third and ESI a fourth. for the moment, it is safe to assume the following to stay out of trouble:
1 keep your basic at least equivalent to minimum wages and pay PF on this amount
2 for people with salaries over 6,500 keep 50% as basic (ensure it is over minimum wages) and the balance as allowances
10th July 2011 From United States, Los Angeles
Your below 2-liner has given me the CLEAREST understanding of a topic that seems to be a confusion between "Basic V/s Minimum Wages V/s EPF deduction". I'm only hoping your facts are from the right source, because I have understood your statement perfectly.
Thanks Again.... Lionel
13th July 2011 From India, Mumbai
I wish the 2-Liner of Hardik been from a right source. I am not trying to make the topic confusing but the truth is that as per the guidelines of the EPF Deptt., that I am attaching herewith, the deduction of the P.F. cannot be less than the minimum wage. As far as the carry home is concerned it can be obviously more than the minimum wages, no doubt about that. Please go through the Departmental Orders.
14th July 2011 From India, Mumbai
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14th July 2011 From India, Lucknow