16th March 2017 From India, Chennai
What the answer given by Mr.Saikumar to your original query is a brief but absolute and correct one as well based on the provisions of the applicable Law particularly in force on the subject-matter of Provident Funds to industrial employees. Your further response in this regard certainly raises a philosophical query to cull out the general ideology behind the exemption of certain allowances from the periodical earnings of the wage/salary earning classes for the purpose of conferring certain benefits to them apart from taxation purposes. Well you know that it is really a very difficult question to respond with a precise answer that can be universally acceptable and applicable. Let me, therefore, try my level best in the search for an appropriate answer in this regard as follows:
Basically, wage/salary with grammatical variations and not withstanding its periodicity of payment is an ecnomic reward paid in consideration of the services/job done by an employed person as per the contrat of employment. To put it otherwise, this economic reward is simply the monetary quantification of the contribution made by the employee to the overall activity of the establishment so as to ensure his retainment. But we know well that employment can not be an isolated aspect from the whole activities of an economy. The general factors affecting an economy have got a cascading effect on the sphere of employment too which culminates in the reassessment of real wages earned by the employees from time to time. In my opinion, such a situation of adjustment gave rise to the concept of allowances forming an integral part of wage/salary structure decided on the basis of job-evaluation rather than individual contribution. Hence the distinctions as basic wage/salary and allowances.
During the entire predetermined period of the Wage/Salary Structure, the basic wage/salary is kept fixed and the allowances variable depending upon factors like increase in cost of living, annual increments etc., thus making the entire pay-outs as cost to the employer or CTC determined on annual basis and the Gross Remuneration to the individual employees. Therefore, the employer has to incur expenses in the form of direct and indirect benefits to employees. Such of those indirect expenses forming part of fringe benefits of employment like gratuity, pension, employment accident insurance, provident fund incurred by the employer logically deserves to be exempted from the calculation of wage/salary for the purpose of such benefits. That's why other than D.A, all other allowances like HRA are exempted from wage/salary for the purpose of computation of such indirect benefits. Hope, I've cleared your doubt, if not fully, but to some extent
16th March 2017 From India, Salem
Our learned member Mr.Umakanthan brilliantly explained the economic perspective behind excluding HRA. I do not venture to add any thing more to it excepting making a humble attempt to explain the legal perspective of the issue.as under.
The term 'Basic Wages' under Sec.2(b) of the P.F Act is defined to mean and include all emoluments, earned by an employee while on duty,or leave or holiday as per the terms of contract of employment and at the same time specifically excluding certain allowances like D.A, cash value of food concession, OT allowance,HRA, bonus, commission and other similar allowances.Thus initially, basic wages came to be understood as only basic pay. However DA was included for the purpose of PF contribution in terms of sec.6..This notion that basic wages means basic pay, also draws support from the definition of "Pay" under Sec.2(f) P.F Scheme 1952 which states it includes basic wages +DA + retaining allowance.
As the time passed by, the word "basic wages' became a subject of .intense interpretations and legal wrangling between employers and the PF authorities with employers narrowing the definition to basic + DA and the PF expanding it to include all other allowances excluding HRA. The matter reached various High Courts in the country. The hon'ble Gujarat High Court in Gujarat Cyprromet Ltd case and other High Courts oin some other cases interpreted the word 'emoluments' ( as the Act did not define it) in the definition of Basic wages u/sec.2(b) in its plain meaning as including any benefit / compensation received by an employee for his service and by that interpretation,, it covers allowances like conveyance allowance, lunch allowance,medical allowances (which are not specifically excluded by the provision) and that it would have included HRA also had it not been excluded by the said section. Thus the courts excluded HRA but did not explain any reason behind the legislative intention to exclude it as the Courts won't resort to interpretation of the statute when the meaning and context of a legal expression is plain and clear.
That's why I only stated that HRA is excluded from basic wages as the said section itself excluded it but this is not the end to the issue.However, employers aggrieved by the decisive of the High Court filed appeals before the hon'ble Supreme Court challenging their orders which are pending before it. So the issue did not reach finality.let us await disposal of the appeals.
Till then we attempt a possible assumption about the rationale behind excluding HRA from basic wages.
1).when the legislature enacted the PF Act in 1952 , it's intent might have been to define basic wages to mean only basic pay as other allowances like conveyance allowance or lunch allowance or medical allowance etc except HRA or OT at that time (1950s) might not be a normal feature of emoluments. So it specifically excluded DA,HRA , bonus and the other similar allowances which might have been standard features of salary at that time..
2) Secondly there might be a wide variation in the quantum of HRA payable to various employees both within the establishment and across the industry.This might result in wide disparity in accrual of PF benefits among same class of employees.
3) It might have been that it was only the basic pay that might have been standardized at that time (1950s) and which was being uniformly paid to all employees as was also the requirement under Minimum Wages Act 1948.. DA too was being paid to all employees even at that time as it was linked to cost of living and other sallowness might not have been both uniform and universal in case of all employees.So a measure of uniformity in PF benefits at least among a particular class of employees might be achieved, if it were confined to basic pay +DA.
4) It might be that the intention of the legislature not to impose any financial hardship on the employer by including other emoluments like HRA or OT as he is also required to match employee contribution + bear administrative and inspection charges + the contribution for EDLI also..
These probably are the ground to exclude HRA but let us wait for the Apex Court judgment on basic wages. Trust I could succeed somewhat in giving a sense on the issue.
HR & Labour Law Advisor
17th March 2017 From India, Mumbai