Is It Mandatory to Set 70% Basic & DA on Gross Salary? Seeking Advice on Compliance Issues

Dear Seniors,

We are in the process of obtaining a new registration number for PF contributions. During discussions regarding our salary structure, with 40% basic on the total gross salary, the Enforcement Officer of EPFO pointed out that there should be at least 70% of basic & DA on the total gross salary. He emphasized that this is mandatory, citing instances of organizations not complying with this requirement. Ultimately, he mentioned that maintaining at least 65% is acceptable, but not lower than that.

My question is, should we structure employees' salaries with 70% or 65% basic & DA on the total gross salary as a mandatory practice? From my observations, many companies do not adhere strictly to this rule and tend to follow their own policies.

I have recently joined a 4-year-old organization in the service sector that has not been compliant with the laws in force in Karnataka or Central laws. Although they obtained a PF registration number a couple of years ago, they have not remitted contributions, leading to notices from the PF office.

I urge you to discuss and provide your prompt response to this query with your valuable comments and suggestions.

Regards,
AHN

Provident Fund is contributed as a percentage (12%) of Salary. Salary for this purpose includes Basic salary and Dearness Allowance. If you say that out of, say, 6500 rupees paid to an employee, Rs. 6000 is HRA or other allowance and only Rs. 500 is the salary (basic + DA), it will be deemed as an attempt to reduce the employer's contributions. That's why the Enforcement Officer has asked you to bring at least 70/65% of the gross as Basic + DA. In fact, the law also requires maintaining the basic salary and dearness allowance in such proportion. But there is no hard rule to say that the Basic + DA should be 70%. Normally, the Basic Salary is the actual salary, and DA is taken as a percentage of this basic. Similarly, HRA is also given as a percentage of basic.

Regards, Madhu.T.K

As Madhu pointed out, it is not mandatory to have 70% of gross salary as the basic and dearness allowance. Usually, organizations will not follow this kind because of IT. The more the allowances are, the less IT can be deducted. You too can go ahead with 40% of Gross as basic.

Regarding your query of not remitting the contributions, probably you better approach some public relations officer. They will guide you better on what to do.

Except in the case of minimum wage or unless it is specified that minimum wage is the baseline, the employer can make any bifurcation that suits its own policy where the wages are higher than the minimum wage. None of the government authorities can provide any directives to alter this. I hope this response meets your requirements.

With thanks,
Asitabha Sanyal

Here I would like to mention that whatever may be the percentage related to Basic, DA, etc., for the calculation of PF contribution. However, the Admin charges on PF & EDLI are calculated based on the total gross salary of an employee. Whereas in many companies, they calculate that also on the basis of the total of Basic+DA, which in my opinion is wrong. Tomorrow, the PF authorities may create a problem. If I am wrong, correct me.

Regards,
S. Kumar

Dear,

There is no rule that 70% should be basic + DA; however, you have to pay PF on minimum wages. But if you keep 40% of the total gross, it seems that you want to avoid PF contribution. Suppose someone's gross is 10000, then according to your concept, 4000 will be basic. Then where will you adjust the rest 6000?

In my view, 6000 should be basic, and 2400 can be HRA, and the rest can be adjusted in another head. Your other point is a little serious. Please sort out that recovery matter.

J. S. Malik

My dear, you are all right.

But the actual is 50% basic in Mumbai, Kolkata, Chennai, and Delhi. In other cities, it comes to 40% of the gross. Conveyance allowance is a maximum of Rs. 800 per month, and medical allowance is Rs. 1250 per month. The remaining amount is distributed depending on the company policy. Am I right?

Dear Mr. Kumar,

As per the PF Act, wages mean Basic and DA and not Gross Salary, hence there is no need to contribute Admin./EDLI charges on Gross Salary.

The Enforcement Officer has no right to say the Basic and DA should be 70% of Gross Salary, and there is no law that provides for it. The normal industry standard of BP & DA is 40% of Total Gross Salary. As one of our friends rightly said, you should not have Rs. 500 as Basic and Rs. 6000 as HRA with a total Gross Pay of Rs. 6500.

Since you are new to the PF, I suggest you restrict PF contributions with a maximum salary of Rs. 6500 as stipulated in the Act.

A. B. Srinivasan

Thank you, Mr. Srinivasan, for clearing my doubt. Since yesterday, I have been searching for an article in support of my opinion on admin charges. If it is found, I will revert back to you for further clarification regarding the admin charges.

Regards,
S. Kumar

Sir, can you tell me the salary breakup according to government rules?

Basic = %

DA = %

Sir, please tell me.

Hi Mr. Srinivasan,

I have one doubt. For example, one of our employees has a BA+DA of Rs. 10,000/-, and we are contributing to PF on 10000 (Rs. 1200 being 12% of Rs. 10,000/-). For the pension fund, we are contributing 8.33% of Rs. 6500 (i.e., Rs. 541), and the balance amount goes to the Employees PF.

Here, I have the doubt that, for calculating EDLI and EDLI administration charges, should we consider Rs. 6500 or Rs. 10,000?

Waiting for an early reply.

Hi Mr. Srinivasn,

I have one doubt. For example, one of our employees has BA+DA of Rs. 10,000/-, and we are contributing to PF on 10000 (Rs. 1200 being 12% of Rs. 10,000/-). For the pension fund, we are contributing 8.33% of Rs. 6500 (i.e. Rs. 541), and the balance amount goes to the Employees' PF.

Here, I have the doubt that for calculating EDLI and EDLI administration charges, should we consider Rs. 6500 or Rs. 10,000?

Waiting for an early reply.

Manoj

Dear Mr. Prasad,

Recently, we had a PF inspection at our office. We maintained all the relevant documents in a clear manner, but we are currently following 50% basic and DA on gross. The PF officer strictly mentioned that we have to follow a minimum of 65-70%. Eventually, we agreed to comply, even though we were fined 70,000 Rupees for not maintaining the 70% on gross; they initially asked for 140,000 Rupees, but we negotiated and paid 70,000 Rupees with the help of the PF enforcement officer. When inquired about the rule for the 70%, they simply stated that there is no specific rule, but they will find other ways to enforce it.

We have now restructured all the basic components to be at 60% of the basic on gross. It seems there is no way to avoid the scrutiny of the PF officials; this is based on my real-time experience.

Thank you.

Even if EPF is contributed on Rs. 10,000, EDLI (like EPS) is contributed on a salary of Rs. 6,500 only. Similarly, administrative charges on EDLI are also calculated on Rs. 6,500.

Regards,
Madhu.T.K

Mr. Kumar, in my opinion, the admin charges on PF & EDLI are calculated on earned basic + DA (PF wages), but not on the total gross salary. This can prove to be a huge burden on employers' contributions.

Kareem

Dear friends,

Thank you all for your responses and the suggestions. I apologize for the delayed reply as I just noticed the replies under my subscribed discussions.

Best wishes!

Regards,
Prasad

Salary Structure Bifurcation

According to my observation, the bifurcation of the gross amount will be as follows:
- Basic + DA: 50% of gross
- HRA: 20% of gross
- Conveyance: 6% of gross
- Medical: 10% of gross
- Education: 1%
- Other Allowances: 13% of gross

Please correct me if I am wrong. I have a question for all my seniors: how should a bonus be shown in the salary statement? I learned that the bonus percentage will be 8.33% of 3500 or Rs. 100, whichever is more. Kindly assist me.

Thanks,

Ritu Sinha
KCPL

You are wrong, Kumar. Admin charges on PF are calculated based on Basic + DA used for the calculation of PF contribution. Administration charges on EDLI are calculated on 6500 or Basic + DA, whichever is less. Admin charges are not calculated on the gross salary. Why should the employer pay simply on a higher salary without getting any benefits like an increase in life insurance or an increase in pensions?

Dear Seniors,

My question is, what percentage of Basic, DA, and HRA should be allocated to the Annual CTC?

Thanks and Best Regards,
Farhan Ajrekar - HR
Akash Fish Meal