Impact on PF Contribution post Supreme Court’s verdict by
Bench of Justices Arun Mishra and Naveen Sinha.
Essentially, it means that the PF contribution will be on the total amount including all the
allowances paid to an employee and not just on the basic salary.
The Supreme Court ruled that 'special allowance' must be included in basic pay for calculation
of provident fund (PF) deduction from employees and the company.
A bench of Justices Arun Mishra and Naveen Sinha dismissed appeals filed by many companies
questioning the Provident Fund Commissioner’s decision to club basic pay with special
allowances for the purpose of deduction of PF and matching contribution by employers.
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 to be
considered for calculating PF contribution.
Allowances failing to fulfill the below test shall be considered as basic wages for charging PF on
Points discussed and put forward by Hon'ble Supreme Court are as under –
1. The Act was a social welfare legislation meant for protection of the weaker sections of
the society, i.e. the workmen, and was therefore, required to be interpreted in a
manner to sub serve and advance the purpose of the legislation.
2. Under Section 6 of the Act, the appellant was liable to pay contribution to the provident
fund on basic wages, dearness allowance, and retaining allowance (if any).
3. To exclude any incentive wage from basic wage, it should have a direct nexus and
linkage with the amount of extra output.
4. Inclusions : whatever is payable by all concerns or earned by all permanent employees
had to be included in basic wage for the purpose of deduction under Section 6 of the
5. Exclusions : It is only such allowances not payable by all concerns or may not be earned
by all employees of the concern, that would stand excluded from deduction. It is only
when a worker produces beyond the base standard, what he earns would not be a basic
wage but a production bonus or incentive wage which would then fall outside the
purview of basic wage under Section 2(b) of the Act.
6. Special Allowance in case / appeal was in question was a a part of the salary breakup
payable to all employees and did not have any nexus with extra output produced by the
employee out of his allowance, and thus it fell within the definition of “basic wage”.
Dearness Allowance was payable in all concerns either as an addition to basic wage or
as part of consolidated wages.
Retaining allowance was payable to all permanent employees in seasonal factories and
was therefore included in Section 6. But, house rent allowance is not paid in many
concerns and sometimes in the same concern, it is paid to some employees but not to
others, and would therefore stand excluded from basic wage. Likewise overtime
allowance though in force in all concerns, is not earned by all employees and would
again stand excluded from basic wage.
7. Attendance incentive was not paid in terms of the contract of employment and was not
legally enforceable by an employee. It would therefore not fall within basic wage as it
was not paid to all employees of the concern. Likewise, transport/conveyance
allowance was similar to house rent allowance, as it was reimbursement to an
employee. Such payments are ordinarily not made universally, ordinarily and necessarily
to all employees and therefore will not fall within the definition of basic wage. While
conveyance allowance was paid to all employees without any proof in respect thereof
8. Special incentive or production bonus given to more meritorious workmen who put in
extra output which has a direct nexus and linkage with the output by the eligible
workmen. When a worker produces beyond the base or standard, what he earns was
not basic wage. This incentive wage will fall outside the purview of basic wage.
9. Any Variable earning which may vary from individual to individual according to their
efficiency and diligence will stand excluded from the term “basic wages”
1. Supreme Court has given the judgment at respective appeals. Order /circular confirming
the implementation are expected from various RPFC’s. Till then above parameters are to
be used to check the existing pay structure.
2. Wage ceiling of 15,000/- per month is not revised.
3. PF Contribution at the rate of 12% of Basic Wages up to 15,000/- is minimum mandatory
required contribution. Even if considering all allowances under Basic wages minimum
mandatory required PF contribution is capped on Rs.15, 000/- unless and until there are
no orders from EPFO Authorities amending the PF wage ceiling.
Date: 05 March 2019
Ms. Amruta Magar
M : 9769003570/ 7420013335 5th March 2019 From India, Pune