Understanding PF Deduction on Leave Encashment and HRA Exclusion: Legal Insights

Hi to everyone,

I am facing a problem for the last few days. When we deduct PF on leave encashment, and the leave encashment amount is inclusive of HRA, is it liable for PF deduction, or should HRA be excluded from the leave encashment amount at the time of PF deduction?

Please help me and kindly provide any legal reference in this regard.

Hi Richa,

You should exclude the amount of HRA as you were thinking, and then proceed with the leave encashment for the employees.

All the best.

Regards,
Rohit K.

Richa,

Herewith details for you.

Basic Wages:

"Basic Wages" means all emoluments that are earned by an employee while on duty or on leave or holiday with wages, in either case, in accordance with the terms of the contract of employment and which are paid or payable in cash. However, it does not include:

- The cash value of any food concession
- Any dearness allowance (that is to say, all cash payments by whatever name called, paid to an employee on account of a rise in the cost of living), house rent allowance, overtime allowance, bonus, commission, or any other allowance payable to the employee in respect of employment or of work done in such employment
- Any present made by the employer

Explanation:

'Pay' includes basic wages with dearness allowance, retaining allowance (if any), and the cash value of food concessions admissible thereon.

Hope the above would satisfy you.

Santosh Iyer
Email: santosh_iyer79@rediffmail.com

Hi Richa,

I am Rakesh Kumar Sharma from Gurgaon. First of all, please go through the details mentioned below regarding the PF Act 1952.

CONTRIBUTION OF EMPLOYERS

Rates of Contribution:

a) The Employees' Provident Fund Scheme

In respect of establishments employing 20 or more persons and engaged in the industry notified under Section 6 of the Act (other than the Establishments declared as sick), 12% of the basic pay DA, cash value of food concession, and retaining allowance, if any, subject to a maximum per month. Voluntary higher contributions are also acceptable at the joint request of the member and the employer. However, the rate of contribution is 10% in respect of the following categories of establishments:

- Any establishment covered prior to in which less than 20 persons are employed.
- Any sick industrial company as defined in Clause(0) of Sub-Section(1) of Section 3 of the Sick Industrial Companies (Special Provisions) Act 1985 and which has been declared as such by the Board for Industrial and Financial Reconstruction.
- Any Establishment which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth.
- Any Establishment engaged in manufacturing of (a) Jute, (b) Beedi, (c) Brick, (d) Coir (other than the spinning sector), (e) Guar Gum Industries/Factories.

It means that your decision to exclude HRA for PF calculation is okay. For further clarification, you may log on to http://epfindia.com <link updated to site home>

Regards,

Rakesh Kumar Sharma
9810680048

Hi Lavanya,

Yes, PF should be deducted on EL encashment at the time of settlement.

Regards,
Rakesh Kumar Sharma
9810680048

Hi Richa,

You have to pay PF on leave encashment as per the definition of wage. Therefore, minus HRA, pay PF on that amount.

Regards

Dear All,

As per the latest court rulings, PF has to be deducted on leave encashment. There are no ifs and buts on that. At the time of final settlement, you encash the remaining leaves of the employee; therefore, PF has to be deducted. As far as HRA is concerned, PF is not deductible on it.

KKT

Hello, I am Prajkta Marathe from Maharashtra. I have one query regarding this concept. In our organization, PF is deducted only on basic and DA, not on HRA or on retaining allowance. Please suggest whether this system is right or wrong.

Regards,
Prajkta

Hi Prajakta,

PF is being deducted on Basic and DA only. HRA is not included when deducting PF, so your organization is doing it correctly.

Regards,
Amit Seth.

Dear Prajakta,

Sorry for the late reply. As already mentioned by Mr. Seth, PF has to be deducted only on Basic and DA, not on HRA and Retaining Allowance.

KKT