Is My Company Allowed to Change PF and Bonus Deductions Without Notice?

Respected Seniors,

I am working in a manufacturing unit. My company deducts PF 12% and ESI from all employees. Recently, they have started deducting PF 24%, bonus 16%, and ESI from new employees. My question is whether my company is entitled to make these deductions without any written documents from the PF office or change the salary structure without notice from any office.

Explanation of CTC

Kindly help me by explaining about CTC.

Thanks & regards,

Dear Mr. Atul, how can a company change its salary structure? As per statutory compliance, my company is already registered in PF and deducts 12% of all employees' salaries. However, it has now started deducting 24% of the PF from newly joined employees' salaries. Is this in accordance with the law? Kindly advise.

Thanks and regards,

Understanding Net Pay, Gross Pay, and CTC

Please understand the difference between Net Pay, Gross Pay, and CTC.

Net Pay means whatever you are getting in your hand, otherwise known as Take-home salary.

Gross Pay means whatever is shown on your payslip before deducting the PF (12%), ESI (1.75%), Income Tax, any Salary Savings Insurance scheme, etc.

CTC means the company spends on you everything that will be added, like Employer PF (12%), Employer ESI (4.75%), all perquisites, and whatever you receive in kind (like accommodation, Canteen Lunch/Tea/Snacks subsidy, Conveyance Vehicle, Uniforms, or Factory Suits Provided, etc.).

Always ensure you confirm the same from your Offer of employment issued to you by the company for real clarification. Whatever they mention about the compensation package in your offer letter as CTC, Gross, or Net Pay.

Thank you.

Thank you for your valuable reply. However, my question is, can my company deduct PF at 24% from new employees' salaries and not contribute from the employer's side, given that it deducts 12% PF from old employees? If so, is there any approval needed from any PF office?

Thanks & regards,

Employee Consent for Deductions

It is not required to take the consent of the employees as the amount is being deducted and put into the PF account. Employers are known to do this as a best practice.

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Understanding EPF Contributions and CTC

As per the EPF Act, the deduction of 12% for both employee and employer contributions are two different things. Additionally, the employer has to pay 1.61% as administrative charges on A/c 10 & A/c 22. Therefore, I fail to understand why they are not including this cost if it is a CTC arrangement.

According to the law, it is illegal to deduct the employer's contribution from the employee's share. You can file a complaint with the RPFC using your appointment letter where the gross salary is stated.

All our colleagues have explained to you that both sides (employers & employees) of PF are part of CTC, which is correct. However, as you mentioned, your organization is also going to deduct a bonus of 16%, which is doubtful. Please check the deduction percentage of the bonus amount because, as per the applicable Bonus Act, no organization can deduct a bonus of more than 8.33% on basic + DA.

Regards,
Dnyaneshwar

CTC stands for Cost to Company, which includes all payable allowances for employees, both direct (such as basic salary) and indirect compensation (like deductions for PF, Bonus, LTA, ESI, etc.). According to the PF Act, administrative charges of 1.61% are not considered part of individual compensation; rather, they are service-related expenses that the employer is responsible for bearing. Therefore, no organization has the right to deduct admin charges from employees' salaries.

Regards, Dnyaneshwar

Thank you for your message. Regarding the discussion on CTC, it is absolutely correct. Now, coming to the new appointment, suppose the person is appointed and the company states a salary of 7500/- per month, then how does the CTC calculation work?

Regards,
Satish

As per the CTC, the employer might have been deducting both shares from the employee only.

Regards,
Kumar

As you correctly mentioned, admin charges are not part of compensation. However, we are discussing CTC, and if the employer includes the costs associated with an employee in the employment contract, then the 1.61% is also a cost related to a specific employee. It is a cost that the company pays towards an employee to the government. Therefore, CTC should be 12% (employee) + 13.61% (employer) + ESI where applicable.

Additionally, a new ruling has increased the bonus limit to a minimum of 11% and a maximum of 20%.

Regards,
Anuradha

Thank you for updating us on the latest amendment in the bonus act. CTC (Cost to Company) refers to the contract between employers and employees for finalizing individual compensation benefits, which could be on a return basis, such as the PF amount, or involving future risk factors like ESI, WC premium, etc.

If you have noticed, PF administrative charges are neither part of the return-based compensation nor part of any risk factor compensation; therefore, they are not applicable to employees as they do not constitute compensation.

I hope this clarifies your doubts.

Regards,
Dnyaneshwar

I have joined as an HR Generalist a few days back and am trying to understand the job. Please let me know if my understanding is correct.

Understanding CTC and Salary Components

CTC: Any cost incurred by the company in hiring.
Gross = CTC - (PF + gratuity contribution by the company)
Net = Gross - (PF + Professional tax)

Is my interpretation correct?

Thank you.
Regards,

As explained by "boss2966," there are three classifications of salary:

1. Net Take Home

2. Gross

3. CTC

CTC is the part where most employers play with the compensation offered to the employee. Say, you are offered a CTC of Rs. 7500, then the calculation will be like this (assumption only):

- Basic: 3200
- Medical Allowance: 1250
- HRA: 1495
- Conveyance: 800

----------------------

Gross: 6745 (Part A)

Now ADD... (Though actually, it is a deduction, but it forms the whole CTC)

- PF Employer Cont.: 435.52 (12% of Basic + 1.61% Admin Charge)
- ESI Employer Cont.: 320.39 (4.75% of Gross)

-----------------------

CTC: 7500.91 (Part B)

Less...

- PF Employee Cont.: 384 (12% of Basic)
- ESI Employee Cont.: 118.04 (1.75% of Gross)

502.04 (Part C)

----------------------

NET TAKE HOME: Part A – Part C

= 6243

From the above calculation, you must now understand what the exact net take-home salary would be.

Understanding Net Pay, Gross Pay, and CTC

Please understand the difference between Net Pay, Gross Pay, and CTC. Net Pay means whatever you are getting in your hand, otherwise known as Take-home salary. Gross Pay means whatever is shown in your payslip before deducting the PF 12% and ESI 1.75%, Income Tax, any Salary Savings Insurance scheme, etc. CTC means the company spends on you everything will be added, like Employer PF (12%), Employer ESI (4.75%), all perquisites, and whatever you get in kind (Like accommodation, Canteen Lunch/Tea/Snacks subsidy, Conveyance Vehicle, Uniforms, or Factory Suits Provided, etc.). Always confirm the same from your Offer of employment issued to you by the company for real clarification, whatever they mention about the compensation package in your offer letter as CTC or Gross or Net Pay.

Components of CTC

CTC means the cost to the company, which includes PF contribution on both sides, ESIC contribution on both sides, Basic salary, H.R.A; Medical up to Rs. 15,000/- per year, Conveyance up to 9,600/- per year, Long Tour Allowance, Accident Insurance, paid leave, Sick Leave, Earned Leave, Casual Leave, Holidays, Bonus, mobile allowance & Less: Profession Tax & Income Tax, etc.

Thanks,
Vijay Matte

As per the PF Act, the employer has to pay their contribution towards PF and other administrative charges, which amounts to 13.61%. They are only required to deduct 12% from the salary of the employee. If you check your payslip, you will notice that there is no deduction from your salary sheet for the employer's contribution.

Understanding CTC

However, CTC means Cost to Company, which is all-inclusive. In your appointment letter, the company will display the contribution paid from their end, not the amount that will be deducted from your salary as per the statute.

If you are so worried about PF contribution being 24%, why not avoid PF and request them to adjust the same in other components such as basic pay and other allowances? However, you must fall above the PF bracket to fill Form 11.

Usually, companies deduct PF at 24%.

Regards,
Arjun

Understanding CTC

CTC is Cost to the Company. It includes everything that the company pays to an employee, such as employer as well as employee contributions to PF, employer as well as employee contributions to ESI, etc.

Contributions and Deductions as per the PF Act

I would like to outline the contributions and deductions as per the PF Act for each employee and employer, as detailed below on the combined challan:

1. Account No. 1:
- Employee: 12% on Basic
- Employer: 3.67% goes to Provident Fund (PF)

2. Account No. 2:
- Employer: 1.1% deducted as Admin Charges of PF on Basic Wages

3. Account No. 10:
- Employer: 8.33% goes to Employee Pension (EPS)

4. Account No. 21:
- Employer: 0.5% goes to EDLI

5. Account No. 22:
- Employer: 0.01% deducted as Admin Charges of EDLI

Total Contribution:
- Employee: 12%
- Employer: 13.61%

This means the total amount of PF contribution is 25.61% from both the employee and employer.

Thank you.

Subject: Re: CTC

Hi friend, please help me. This is the detail of the employee. I have to prepare an Excel sheet for this payroll. It's my assignment. Kindly help me, friends. I tried, but I don't know how to deduct HRA, etc., all the payroll deductions. If you can, please help me. My ID is [Email Removed For Privacy Reasons].

a. Head 6 to 8 members CTS is 600,000-800,000
b. Assistant manager - 12 members - 400,000-600,000
c. Engineers - 12 members - 200,000-400,000
d. Supervisor - 30 members - 100,000-200,000
e. Unskilled - 20 members - less than 100,000

Sir, I completed one payroll for A:
Gross salary is 50,000
Basic 15,000 (50,000*30/100)
HRA 10,000 (50,000*20/100)
City compensation 15,000 (50,000*30/100)
Conveyance allowance 9,600 (800 per month)
Total: 99,600

Deductions:
ESI employee 875 (50,000*1.75%)
ESI employer 2,375 (50,000*4.75%)
EPF employer 6,000 (50,000*12/100)
EPF employee 6,000 (50,000*12/100)

Net salary is 84,350.

Is this correct, friends? Is this the way we put payroll for individuals?