Is It Legal for Companies to Restructure Salaries, Increasing Take-Home Pay but Reducing PF?

Dear,

Let us say a company conducts a revision of the entire salary structure by adding allowances and reimbursement heads. This maintains the CTC, increases the Cash in Hand, but decreases the amount allocated to Basic pay. Consequently, this adjustment affects the PF contribution, leading to a decrease for some employees. Is it permissible for the company to make these changes?

Please help. I am confused due to the provisions of section 12 of the PF Act 1952. Please remember that while the take-home salary has been increased, the basic pay has been decreased to distribute the CTC into different heads.

Dear Sonica,

Please understand we cannot decrease the basic salary at any cost; otherwise, you will be answerable to the PF department.

Regards,
Jagdish Pathak
# 9811488664

Dear Sonica,

It's not only basic but also DA that you cannot decrease at any cost.

Regards

Hi,

As long as the Basic + DA is below Rs. 6500 per month, it is mandatory to pay PF on Rs. 6500. You cannot reduce the basic + DA component in such cases.

Once the Basic + DA crosses Rs. 6500, then it is mandatory up to Rs. 6500 and voluntary on the salary above Rs. 6500. However, any reduction in basic + DA (in respect of salaries above Rs. 6500 to the level of Rs. 6500) would not be objectionable under the law as the PF contribution is being protected, and the objective of the PF scheme is not undermined.

Think it over.

Regards

Are there any fixed/minimum percentages for DA, HRA, and Conveyance allowances in a limited company? What are their applicability formulas, if any? For example, is DA a certain percentage of Basic, is HRA a certain percentage of Basic or Basic+DA, and so on.

Dear Sonica,

There is no prescribed percentage for various components in the salary structure. However, income tax benefits are available on the various allowances up to certain limits only. If you wish to re-structure the salary, please keep in mind the income tax benefits available to the employees and the employer so that it is beneficial for both.

Hope this helps you.

Thanks & Regards,

Avika Kapgrow Corporate Advisory Services Pvt. Ltd. E-173, Kalkaji, New Delhi - 110019 [Login to view] 09310270884

Hi Sonica,

The PF is applicable on a minimum basic of Rs 6500/- per month. So if an employee's Basic + DA is 6500/- or even more than that, you can give them the benefit of deducting PF only on Rs. 6500/- as per PF Act.

E.g., an employee's basic + DA salary is Rs. 10000 per month. So the PF contribution is Rs. 780/- per month (12% of Rs. 6500/-, minimum PF wage). This will increase the take-home pay of the employee.

That was a real help from all. I was extensively working on the restructure of my organization's previous salary structure. Working on the same thing had troubled me a lot. I hope I could give a structure that cannot be challenged. One thing to clarify further is, are minimum wages applicable on CTC or Cash in hand.

Dear all,

Is there any fixed slab for fixing Basic, like 45% above on Gross?

If there is no such kind of fixation at the time of recruitment, only we can fix their Basic as low so that they can get a good take-home. Clarify it.

Regards,

UDAY

Please note: The organization has every right to change its compensation and benefit policy as and when it deems necessary or fitting. If the structure (salary) defined reduces the basic pay (thereby reducing the PF), then it is totally within the legal parameters. The reason for this is that the employer is not receiving any benefit from the restructuring of the salary; it is the employee who ultimately benefits with extra cash in hand to spend.

Feel free to comment.

Hello sir,

I am an HR management trainee. I just want to know if, for example, the salary of a person is $5000, how much amount can we allocate to HRA and basic pay? Is there a specific limit for this under ESI and PF regulations? Please reply as soon as possible.

Thanks and regards,

Sakshi Sachdeva

Dear Sonica,

We can't reduce the basic pay of an employee. It will affect several aspects such as PF, Gratuity, Bonus, WC, and also HRA exemption in IT. From the employee's perspective, it is unfair.

Regards,
Bala

Hi,

We can do so in some cases. For example, if we engage trainees for a period of 1 year with a stipend of Rs. 12,000 per month, the PF contribution for that period would be within a limit of Rs. 6,500. On completion of training and upon confirmation, if he fits into a salary wherein the basic is less than Rs. 6,500, the PF contribution will automatically reduce.

However, all the above details should be incorporated as terms and conditions in the Training letter issued.

Yes, it is true that for an employee to come under the PF, his basic plus DA must be within 6500/=. However, it has become the policy or practice to cover all employees irrespective of their salary. Therefore, the reduction of basic cannot be done; the only way is by way of punishment, basic can be reduced. This is why I always advise employers not to extend the PF benefits. Instead, there are some schemes where employees can be covered if their basic plus DA is more than 6500. These include the Public Provident Fund, Superannuation Fund, and other schemes such as education, uniform, housing advance, etc.

Nagaraj

Dear Folks,

Yes, the company may revise its salary structure.

No, the amount of basic pay cannot be reduced.

Best regards,
Ajay Chaudhari

Dear Sonica,

Minimum wages are applicable based on gross salary and not on CTC or in-hand salary. Basic & DA cannot be reduced under any circumstances.

In a special case, you may terminate the individual for 2 or 3 months and then restructure their salary. However, this is only a solution and not a legal opinion.

Thank you.

Practically, while structuring the salary breakup, his basic should not be less than the minimum wage rates or basic shall not be less than basic+DA, as per minimum wage. The HRA must be above 5% of Basic+DA.

Dear Sonica,

Minimum wages are the gross monthly wages paid to an employee, whereas the CTC would include various other directly financial and indirect fringe benefits (for example, the cost of a uniform or the average medical reimbursement, etc.). Cash in hand refers to the salary received after statutory deductions. The statutory deductions are to be made from minimum wages too. Hence, cash in hand is less than minimum wages, whereas CTC is more encompassing than minimum wages.

Regarding any reduction in Basic Pay due to restructuring, PF authorities cannot object as long as you continue to subscribe to the PF. However, considering the requirements of Section 12, you will have to demonstrate that the reduction of Basic wages was necessary and that the total wages are maintained at the same level or more. Perhaps an agreement with the union would help you prove that the restructuring was genuine.

Regards,
KK

You cannot reconstruct the salary structure of employees without their consent; it affects P.F, ESI, and as well as Gratuity.

Shish Uniyal

We cannot decrease Basic at any cost if it is affecting PF, Gratuity, and other perks interlinked.

Regards,
Abhi

Hi Pallavi,

Regarding ESI, there is no minimum wage criteria. ESI is dependent only on Gross salary and not on basic and DA. If the Gross exceeds 10000, then the person is not eligible for ESI. The salary revision should not affect the basic and DA. Moreover, it has to be structured in favor of the employee to avoid more IT burden.

Cheers,
Jeeva

Dear Sonica,

The basic rule of PF is that whoever receives Basic+DA up to 6500 p.m. should have PF contributions made. For those receiving Basic+DA above 6500, the minimum PF contribution should be based on 6500. It is up to the employees to decide whether they want to contribute PF on the amount exceeding 6500 in their salary.

The answer to your question is that once an individual starts contributing to PF & ESI based on a particular salary, the amount cannot be reduced under any circumstances as long as they are employed in the company.

Thanks,
Shiv Kumar

Hi everybody,

I would like to correct some of the opinions people have expressed here.

Firstly, the term "minimum wages" in the case of ESI means the wages up to which the employee's share of ESI contributions is not deductible, and this is Rs. 40 per day or less. Only the management's share of contributions is to be paid. (Refer to ESI employer's guide). (+ Check for the latest figures in force as on the date of application of the law).

Of course, it's another matter that nobody is paid so little nowadays - due to the fixation of the minimum rates of wages by the Government for many types of industries and many categories of workmen.

Secondly, as regards the downward revision of the various components of salary while restructuring the salary structure - two tenets of law are to be kept in mind:
1) A benefit once given cannot be withdrawn,
2) Any change in conditions of service with regard to compensatory and other allowances, withdrawal of any customary concession or privilege, or change in usage, classification of grades, etc., shall need to be done only after the management gives notice of the impending change to the affected workmen. (This is as per the Industrial Disputes Act Fourth Schedule).

The idea of this mail is just to draw the attention of one and all to the provisions of the law. Just check the correct law in force as on the day of implementing your proposals as over time, due to changes in the law, the finer points could have been amended/altered.

So, with these laws in force, just be cautious when you try to make some changes that help workmen take home more now but in their long-term benefits they stand to lose.

When the visiting officials of the concerned departments check the records and find fault, then you may have to make good the loss - which would be too unbearable for the company then.

Take care.

Regards

Minimum wage is the wage you are legally bound to pay, but it never means the net take-home pay.

Regards,
Aseem