Is It Okay for Basic Salary to Be 100%? Seeking Advice on Potential Issues

Dear Seniors, I am in confusion. Can basic be 100%? If so, will it be problematic in some aspects for our organization?

Regards,
Khushi

Basic Pay at 100%: Feasibility and Criteria

Our organization is considering setting the basic pay at 100% to ensure safety and exemption. Is this feasible? Could you please provide the criteria for the basic pay for all staff members?

Regards,
Khushi

Provident Fund Calculation

Provident Fund (PF) will be calculated on Basic, Dearness Allowance (D.A.), and Retaining Allowance if it is a cash-paid food concession.

As per my knowledge, in any law, there is no specified particular percentage of basic to be decided. However, it is the sole discretion of the organization to have a certain percentage of the basic in salary or wages. Its minimum limit is defined by the fixation of Minimum Wages, and hence we cannot pay below that.

Considerations for 100% Basic Salary

As far as 100% basic is considered, you need to verify that other components like PF, PTax, HRA, OT (if applicable), leave pay, etc., are all considered on 100% basic. This will increase your indirect expenses on every employee. Also, take note that if you are thinking of going to 100% basic for exemption of PF, it is not possible. Whatever percentage of basic it may be, PF contributions have to be carried out at the specified percentage.

Please review your decision.

Regards,
Atul S Malve

As per my knowledge, most organizations deduct 12% of the basic pay for PF from both the employee and employer contributions.

An interesting question you have raised. My answers are below. Dear Seniors, please let me know if I'm wrong.

As far as my knowledge is concerned, there is no company that will have employees' salary as 100% Basic. Because if they do, obviously there will not be any more components like HRA, Conveyance, or Other Allowances. If there is going to be 100% Basic, then the indirect expenses for the employer will increase heavily. For example, Basic is generally between 30% - 50% of Gross salary. Bonus, Gratuity, and various other benefits for employees will be calculated based on Basic. So, if you are going to have 100% Basic, then your expenses are going to shoot up, which could have been avoided if you had followed the normal breakup pattern.

Let me know if this helped.

Thanks,
Sethu

Dear Khushi,

There is no restriction on the percentage of Basic. Logically, if the salary of your employee is equal to the minimum wage, then the basic of that employee shall be 100% of their gross salary. The simple principle behind this is that the Basic cannot be less than the Minimum Wages, as clarified by the latest circulation from the EPF Department. It is also mentioned in this circulation that Minimum Wages cannot be bifurcated. You can easily download the above-mentioned circulation letter from this site.

However, if the salary of the staff is more than the Minimum Wages, it is advisable to fix the Basic at 60% of the Gross, with the remaining 40% as other allowances. Having 100% Basic for staff earning more than the Minimum Wages can create problems for your organization. All deductions and benefits on the salary are calculated based on the Basic. In this way, the contributions of your organization will be significant.

Thanks and Regards,

Amarjeet Singh

Generally, there would be a specific limit in fixing the basic salary. For instance, in metro cities, the basic salary is fixed at 40%, and in non-metro cities, it is fixed at 60%.

Question: You raised a query as to why the basic salary can't be 100% of the total salary.

Answer: When the basic salary is 100% of the total salary, it becomes challenging to allocate amounts to other components such as HRA, special allowances, transport allowances, medical allowances, educational fees, LTA, and gross salary. There is no rule for being exempt from PF or ESI, which are nowadays mandatory and beneficial for all employees. However, an exemption from PF can be obtained when a new entrant's basic salary is equal to or more than 6500. Another option for PF exemption is by paying employees as consultants (on a part-time basis) where only TDS (10% of the total amount) is deducted.

To ensure employee benefits, employers can use certain strategies without encountering difficulties. For example, if an employee's salary is 5500 CTC, it can be recorded as 7000 CTC, with 22% shown as present and the remaining 8 days as absent. This approach allows for the demonstration of maintaining minimum wages within the organization while also reducing the amount paid towards PF and ESIC.

I hope you find these ideas helpful. Please let me know more about the company.

Regards,
Vinay Kumar.

Firstly, you have to pay minimum wages to the employees or workmen of your organization.

Definition of Basic Wages

The definition of Basic wages has been defined under section 2(b) of the EPF & MP Act, 1952 as below:

Section 2(b) "Basic wages" means all emoluments which are earned by an employee while on duty or on leave on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but 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 similar allowance payable to the employee in respect of his employment or of work done in such employment;
- any presents made by the employer

Court Ruling on Provident Fund Contributions

But the First Bench of the Madras High Court has stayed the order of a single judge passed in the Management of Reynolds Pens India Pvt. Ltd., Kancheepuram, and others vs. the Regional PF Commissioner-II, Chennai, 2011 LLR 876, holding that the employees' provident fund contributions were payable on various allowances like conveyance allowance, education allowance, special allowances, food concessions, medical allowance, special holidays, night shift incentive, and city compensatory allowance. The stay order was passed in the presence of the counsel for the provident fund department. No next date has been fixed for the final hearing of the appeal.

Recommended Wage Components

However, it is better to have wage components as mentioned below: Basic, DA, and HRA and deduct PF only for Basic. Since minimum wages also include HRA, you can bifurcate the minimum wages as mentioned below:

- Retain the minimum wages Basic as Basic wages
- You can split the DA into two parts: one is DA and another is HRA. This is safer.

Regards.

EPF Contribution Requirements

What is the strength of the organization and the basic salary? A minimum of 20 employees is required. As per the act, those who are receiving a basic salary below ₹6,500 have to contribute to EPF, which is mandatory. From the basic salary, 12% has to be deducted for EPF. If someone's basic salary is more than ₹6,500, it is not mandatory to contribute to PF.

Regards,
Ashok

As per the Minimum Wages Act, the basic salary of the employee should be Rs. 3896/-. If the basic salary of an employee falls between Rs. 3896 and Rs. 6500, the employee's PF contribution will be deducted based on 100% of the basic salary. If the basic salary exceeds Rs. 6500, PF will be deducted on Rs. 6500/-.

With Warm Regards,
Priyadarshini

As far as I know, no law prescribes how much the basic pay should be for any employee, let alone the rest. Of course, for industrial employees who follow a wholesale/Consumer Price Index-based DA system, there is a component called Fixed and Variable DAs (mostly Unionised Estts.). However, it is up to you to fix the basic pay. Why not make it 100%?

To address your concern - many establishments follow consolidated remuneration without breaking it into other components, in which case it will be considered as basic pay only. Am I correct?

Regards,
Kumar S.

Yes, it can be 100%. But it makes a lot of difference to the organization in view of gratuity and other beneficiary terms.

In my opinion, Khushi can definitely keep 100% basic and exempt employees from EPF if the basic is above 15,000/-. In this case, EPF is not mandatory. There is no rule that prescribes the maximum percentage of basic. A company may choose to pay higher gratuity, but that would typically happen only after five years. Bonus is not mandatory for anyone drawing a basic salary above 10,000 PM.

Requesting elders to comment.

As per my knowledge, PF is calculated as basic + D.A., retaining allowance, and cash paid for food concession. The percentage will be as per EPF Act.