Confused About PF Deduction Limits? Why Some Companies Cap It at Rs. 6,500 and What It Means for You

Dear Professionals,

Happy Weekend!

We practice a 12% employee and employer PF contribution. Recently, an employee joined my company as an HR executive. In his previous company, they only calculated PF on Rs. 6,500. If a person has a basic salary of Rs. 13,000, they only calculate PF on Rs. 6,500, and the remaining Rs. 6,500 is not included in the calculation. Although I did not accept this new practice, I am surprised why companies have such policies.

Can anybody help me understand the benefits/disadvantages? I do not see any benefit in this, but he is still interested.

Nimra

Dear Nimra,

You are right. PF has to be paid on the whole amount, but out of the employer's contribution, 8.33% of EPS is deducted up to 6500/- only (the limit is fixed for EPS). Above 6500, it goes into the EPF account of the employee. Below mentioned is an example of the calculation based on a basic of Rs 13000/-

List To %age Max Limit Amount Final amount
Employee contri EPF 12 13000 1560
Employer contri EPS 8.33% 6500 541
Employer contri EPF 3.67% 6500 239
Employer contri EPF 12% 6500 780

Regards,
SNB

Hi,

The ceiling limit for the deduction of PF is Rs. 6,500. Hence, the employer deducts PF for both his and the employee's contributions based on Rs. 6,500.00 only. Any deduction of PF on the amount exceeding Rs. 6,500.00 is at the discretion of the employer only and is a legally binding requirement as per the PF rules and the Act in force.

Mohan Rao
Manager HR

When a law is enacted, there is a minimum limit that must be complied with both in letter and spirit. However, at the discretion of the employer, there is no ceiling for the maximum limit of PF contribution. Nevertheless, the contribution to EPS is restricted to only 8.33% of ₹6500, and the remainder goes to the EPF account.

Hi,

Today, the employer is looking at how best he can cut down the wage load on him in order to minimize the overheads and build the wage load on a slow and steady basis to keep the organization strong for the long run. So, when the ceiling is available, what motivates him to go for higher deductions and pay from his pocket for no reason.

Mohan Rao Manager HR

Dear Sai Nandan Bohare Sir,

What a nice example given for understanding PF and Pension contributions. Thanks a lot.

One doubt I have is that I am joining Allahabad Bank on 20 Sep 2009 and will be governed by EPS 1995 as per the joining instructions. Will the same formula work there if I choose a pension option?

Dear Public Sector Banks have their own PF rules, and this act is not applicable to public sector banks.

Regards,
JS Malik

Dear Friend,

You are right. In good, reputable, large, established companies that care for employee welfare, both employee and employer contributions are 12% without any limit to salary. It is the smaller companies that, to cut down costs and reduce employee benefits, restrict their contribution up to a maximum of Rs. 6500 basic pay - which is the statutory compliance limit. Beyond this, company contribution is optional. Since your company is following this practice, it means it is a company to be proud of.

Regards.

Dear All,

Though the law is there, it depends on the employer's capacity to pay and willingness to pay. Hence, employers who have the capacity to pay an equal contribution of PF based on the actual basic salary/wages of the employees are considered genuine and broad-minded. These employers contribute 12% of the actual basic pay of employees, regardless of the amount.

However, we cannot expect such a decision from the typical orthodox Indian entrepreneur or employer, such as an unprofessional Seth, even if they have the capacity but are not willing to show it.

Sanjeev

Dear Friend,

Yes, PF contribution is 12% of the basic amount, but the ceiling is Rs. 6,500/-. Employers can pay the actual amount if it exceeds Rs. 6,500, but liabilities also increase because the employer has to pay an equal amount of PF contribution plus 1.61% Admin Charges. To reduce the liabilities, the employer considers the ceiling amount of Rs. 6,500/-.

This is not a wrong practice but is prescribed by law.

Regards,
Pankaj Chandan

In the era of cost control from HR, this is one option that's being followed "legally" by some companies. This is not wrong; it will help the employee to take home more cash in the form of salary. Otherwise, show this in CTC. If this is given as an option, individuals do not prefer to lose cash; hence, they will accept this.

Thanks,
Nag Rao

Hi,

There are 2 scenarios:

1st scenario
= Limited PF Contribution
- If the basic salary is more than 6500, then 12% of 6500
- If the basic salary is less than 6500, then whatever the basic salary that multiplied by 12%

2nd scenario
= Unlimited PF Contribution
- Whatever the Basic Salary multiplied by 12%

Examples:
Limited PF Contribution
Basic
10000 > (6500 x 12%) = 780
6000 < (6000 x 12%) = 720

Unlimited PF Contribution
Basic
10000 x 12% = 1200
6000 x 12% = 720

Example: {Basic Salary 10500}
Calculation:
Limited PF Contribution
Gross Salary 35,000
- PT 200
- PF (6500 x 12%) 780
Net Pay 34,020

Unlimited PF Contribution
Gross Salary 35,000
- PT 200
- PF (10500 x 12%) 1260
33540

Employers may decide to pay contributions above the ceiling limit of Rs. 6500. However, based on my knowledge, this additional amount incurred by the employer will not be considered as expenses for income tax purposes. Is this correct?

Regards,
Mohandas

Dear Folks,

The PF ceiling is limited to a minimum of 6500 as per the PF rules; the maximum depends on the employers. However, some companies limit the ceiling for both employers and employees to 6500. Some companies restrict the employees' share to the entire basic amount and the employers' share to 6500. In contrast, some companies cover both the employees and employers' shares for the full amount of the basic salary. Different employers have their practices in place.

Cheers,
Jeeva

Dear Raj Kumar,

Most progressive and "employee care" oriented companies follow the practice that your organization is implementing. It is a healthy practice, and you should continue with this excellent HR initiative.

Cheers!!!! Vasant Nair

As per law, the employer is not statutorily bound to enroll an employee as a member of the EPF Scheme 1952 if their starting salary is more than Rs 6500. Such employees are referred to as excluded employees. However, if such an employee is enrolled as a member, then it is up to the employer to restrict their share to 12% of Rs 6500. The employer cannot be made to contribute on any higher wages. However, many employers, out of their own will, do indeed contribute their share on actual wages irrespective of the limit.

Contribution – Minimum contribution towards PF should be 12% of the Pay.
'Pay' includes basic wages with dearness allowance, retaining allowance, (if any) and cash value of food concessions admissible thereon.

Minimum PF Contribution - 12% of the Pay
Maximum PF Contribution - 100% of the Pay


Voluntary Contribution - Member shall be at liberty to make voluntary contribution. It purely depends on the employee's discretion.


Employer's Contribution - Equal to 12% of the Pay of employee.

Pension Fund (EPS) - 8.33% of Pensionable Salary
Pensionable Salary = Rs. 6500/- or Pay (whichever is less).

Provident Fund -12% of the Pay – 8.33 (EPS)

In the 12% contribution from Employer, 8.33% contribution is kept in Pension fund and the rest is kept in Provident fund, where as employee's 12% contribution is for only provident fund.


Note: As per the PF Dept employee(s) are under PF coverage but after the Basic Pay is >6500 PF cut off, they can opt for PF or not its depends on the employee(s).and also employer can restrict their contribution to PF Cut off amount.

Hi all,

PF to be deducted on Basic + DA + Retaining Allowance, if any, as per Rule 6 of the PF Act.

Mohan Rao
Manager HR