You should include all allowances which you pay to an employee if he is on leave with pay or deduct from the salary if he is on leave without pay. For example, the salary of an employee is Rs 15000 per month of which only Rs 6000 is the basic pay on which you were contributing PF. As per Employees Provident Fund and Misc. Provisions Act, basic pay is the whole emoluments that an employee earns while on duty or on leave and as such it is 15000 which should be called basic wages. Two reasons are there. One, if the employee takes two days Casual leave (with pay) he is paid salary for these days not in proportion to your basic pay of Rs 6000 but on the basis of his monthly pay, ie, Rs 15000. If he takes leave without pay,you will deduct his salary not in proportion to Rs 6000 but it will be 15000/30 or 500 per day deducted for each day of absence. Secondly, it is Rs 15000 that the employee has agreed to wok for you or you had offered him for his labour/service. That means it is not 6000 but 15000 that is the salary as per the contract of employment.
Though the Basic salary excludes HRA, perse, the same being part of salary cannot be excluded from the PF qualifying or contributing salary. This is because HRA is not a separate element which accrues and varies depending upon the city of residence and status of the employee as to whether he owns a house or is residing in rented house, but part of the salary. As such that should also be included in the PF qualifying salary. However, having mentioned in the exclusion part of definition of wages, you can exclude this element from PF qualifying salary.
In any case, the PF can be capped to a salary of Rs 15000 and as such if the total salary including all other allowances exceed Rs 15000,you can limit the contribution to 12% of Rs 15000. 18th April 2019 From India, Kannur