Confused About PF Contributions on Pro-rated Wages? Let's Discuss the Right Approach

Hi All,

I am a finance and HR consultant. I am practicing the following procedure:

This is a scenario where the basic wage is more than Rs. 6500/- and the employee opts to limit his contribution to Rs. 6500/-, i.e., Rs. 780/- against PF and Rs. 541/- against the Family Pension Fund. Let us assume that his notional basic is Rs. 20000/- and he joins in the middle of the month (say worked only for 15 days during the month of joining). His earned basic is Rs. 10000/- and the software limits the contribution to Rs. 6500/-, which in my opinion is wrong.

The basis should be on the notional basic and not on earned basic. If you look at the way RPFC calculates, it is clearly based on workdays and not on this logic. It is also clearly explained in the PF Act. The same logic applies to a loss of pay as well.

Can any of you tell me which one is right?

Thanks a lot,
Hema

Hi Hema,

I am a finance and HR consultant. I am practicing the following procedure: This is a scenario where the basic wages are more than Rs. 6500/- and the employee opts to limit his contribution to Rs. 6500/-, i.e., Rs. 780/- against PF and Rs. 541/- against the Family Pension fund. Let us assume that his notional basic is Rs. 20000/- and he joins in the middle of the month (say worked only for 15 days during the month of joining). His earned basic is Rs. 10000/- and the software limits the contribution to Rs. 6500/-, which in my opinion is wrong. The basis should be on the notional basic and not on the earned basic. If you look at the way RPFC calculates, it is clearly based on workdays and not on this logic. It is also clearly explained in the PF Act. The same logic applies to a loss of pay as well. Can any of you tell me which one is right?

Well, the basis should be on the earned basic, and the same applies to loss of pay as well.

Regards,
Rajat

Hi Rajat,

Thanks for the reply.

1. Is there any notification for substantiating your view?
2. Consider this example: An employee whose 15-day basic is Rs. 10,000/- and based on the "earned basic concept," we have contributed Rs. 541/- to FPF (6500*8.33%). Your annual return will show the lop, and the department will pay FPF only on 541*15/31 and not the entire amount. Explanation to this effect is clearly laid down in the act.

Therefore, it is clear that the basis should not be arrived at after calculating earned basic but on a notional figure. Moreover, employees in some organizations are given the option to limit their contribution to Rs. 780/- (12% of 6500), and this is done based on their master basic and not earned basic. Even the clients accept it, and reputed organizations like "ADP" are following only the concept of notional basic. However, there is an issue with process capability, and hence settling down to a logic that is easy to manage.

Regards,
Hema