Can We Deduct EPF from Special Allowances? Seeking Clarity on Salary Calculations

Dear Senior, can we deduct EPF on Special Allowances? As per the notification dated 4th February 2011, issued by the competent authority under the Minimum Wages (Maharashtra) Rules 1948, the special allowance has been increased to Rs. 1645.40 per month from the earlier Rs. 1394 per month.

Take Home Salary Calculation

Take Home Salary = (Gross Salary) - (Basic + Special Allowances) * 12%?

Or

Take Home Salary = (Gross Salary) - (Basic) * 12%?

Regards,
Alok

Dear Alokji, I believe that allowances do not attract P.F., similar to HRA, Conveyance Allowance, and Medical Allowance. Therefore, I think that even Special Allowance will not attract P.F. Upon reviewing the definition of "wages" as per the EPF Act, there is a specific exclusion of allowances such as HRA, conveyance, and special expenses. Consequently, the take-home salary will be Gross Salary - Basic * 12%.

Thanks,
Niraj J. Shah
Advocate

Under the Minimum Wages (Maharashtra) Rules of 1948, employers need to deduct PF from the salary of the employees. The parameters for PF calculation are (Basic + Special Allowance), i.e., 12% of the (Basic + SA). However, this calculation should not include HRA, Conveyance, OT, or Bonus.

I hope this clarifies your query.

Regards,
Avinash K.

Dear Alok,

Having gone through your posting, one thing needs clarification. The allowance of Rs. 1645.40 is defined as a special allowance, DA, or VDA. As per my understanding, if this allowance is issued by the state government through the competent authority, then it must be treated as VDA or DA, which should be merged with the basic salary. The deduction of EPF on the same will be necessary.

In terms of applicability, EPF should be deducted on Basic + DA/VDA + food conc. (if any), and it should also include allowances that are undefined, such as special allowance or other allowances. I recommend referring to the EPF Act and consulting with labor law consultants on this matter.

Thanks & Regards,

Sumit Kumar Saxena

[Phone Number Removed For Privacy Reasons], [Phone Number Removed For Privacy Reasons]

It seems that there is a mistake. There is no figure like Rs. 1645.40/- anywhere in this notification. At the same time, you should mention the type/schedule of employment too. Kindly revert.

Understanding Special Allowance and PF Contribution

Under ordinary circumstances, a special allowance stands for that allowance which is paid to some 'special category' of employees and not to all employees. If so, the special allowance will not qualify for PF contribution, as was decided in a lot of cases. The latest in that series is Gurukripa Beedi Industry P Ltd Vs Asst. PF Commissioner.

However, the special allowance in Maharashtra stands for variable Dearness Allowance and is a part of the minimum wages fixed by the government. As such, it will attract PF contribution. Besides, all other payments like gratuity, bonus, etc., are also to be calculated taking into account the special allowance as part of the statutory salary.

Regards,
Madhu.T.K

Dear All,

In our organization, one component of the salary is labeled as "Special Allowance." During the PF inspection, we were informed that this component would attract PF contribution. A Navratan Organization recently published the minimum wage rate, and one element of the wage called "Additional Element" also qualifies for PF and ESI contributions.

I kindly request Mr. Madhu to provide guidance on this matter.

Regards,
Shaikh

Dear all,

As per the court judgment of Punjab & Haryana, the minimum wages can be bifurcated into allowances, and PF cannot be deducted on allowances. I am also a bit confused by the judgment. Please suggest. I am attaching the judgment herewith for your kind consideration.

Regards

Understanding EPF Deductions and Minimum Wages

It is clear that the EPF Act was enacted subsequent to the Minimum Wages Act, and the minimum wages include basic salary, DA/VDA, and food allowance if any. However, HRA, washing allowance, conveyance allowance, and various other allowances are to be excluded except for other/special allowances, which are considered a part of DA/VDA as it is undefined.

Therefore, the deduction of EPF should be based on minimum wages, which include (basic + DA) and are described by the state government from time to time after considering the price index. It should only be split into other components like HRA, conveyance, and other allowances if bifurcated, as it would be a complete violation of the Minimum Wages and EPF Act.

Thanks & Regards,
Sumit Kumar Saxena

[Phone Number Removed For Privacy Reasons], [Phone Number Removed For Privacy Reasons]

Special Allowances and PF Contribution

As already stated in my post, special allowances as such will not attract PF contribution as they are paid only to some special types of employees and are not available to all employees.

The Madras High Court in R Ramanathan Chettiar Jewellers, Madurai vs. Regional PF Commissioner, Madurai – 1988 (ii) LLJ 045, has held that where the special allowance is not paid under a contract of employment, settlement, or award but is paid purely out of management's own will and pleasure, then such special allowance would not be taken into account for the purpose of calculating contribution payable under the Act. This ruling emphasizes that a payment which is not of a regular nature and is paid purely at the discretion of the management would not be available for PF contribution.

The Apex Court, while giving a verdict in Bridges and Roofs (India) Ltd Vs. Union of India [1963 (2) LLJ 490], has said that "it seems that the basis of inclusion in Section 6 (of Employees Provident Fund and Miscellaneous Provisions Act, 1952) and exclusion in Clause (ii) is that whatever is payable in all concerns and is earned by all permanent employees is included for the purpose of contribution under Section 6, but whatever is not payable by all concerns or may not be earned by all employees of concern is excluded for the purposes of contribution."

The special allowance in the instant case is paid to all employees and is a part of statutory minimum wages and therefore, it will attract PF contribution. Moreover, the special allowance as per the Maharashtra Govt. notification is nothing but variable dearness allowance. Therefore, there is no point of doubt that it will attract PF.

Regards,
Madhu.T.K

Dear Madhu Sir, I always love to read your comments. I also concur with your view but have a few doubts which you may appreciate. It is only the EPF Chennai that, on its official website, posted that special allowances will attract PF contributions. Now, it is not a notification but merely obiter dicta of a few judgments based on the facts of a particular case. However, it's really confusing. Can we ask the PF to clarify all this under the RTI Act, which will clear our doubts?

The link is below: http://www.epfochennai.tn.nic.in/pdf/RO_basicwages.pdf

Regards,
Anirban
[Phone Number Removed For Privacy Reasons]

I believe that I have made it clear that special allowance paid to all employees in general should be treated as part of the salary, with the presumption that it is shown separately just to reduce the basic salary amount. PF is excluded from those special allowances which are paid only to some special categories of employees.

Moreover, concerning employees who are paid minimum rates of wages or to whom the PF qualifying salary (Rs 6500) or less than that is paid, the cited cases (EPFO Chennai website in reference) could have relevance. For others, there is no significance as by including special allowance, the salary may exceed the qualifying salary of Rs 6500.

Therefore, when special allowance forms part of the statutory salary, it will attract PF contribution. However, when it is paid to a certain category of employees only to defray a special expense, then it is outside the purview of PF.

Regards,
Madhu.T.K

Special Allowance: A Debatable Issue

As of now, there are plenty of litigations pending before the EPF Tribunal, various High Courts, and even the Apex Court on this point alone. Many of these cases have a stay order granted as of today. Has anybody got new updates? Please let us know.

I would like to request that wherever mention of Rs 6500 is made, please read it as Rs 15000 because by now the PF qualifying salary has become Rs 15000.

Madhu.T.K