Leave Encashment and PF: Does It Really Apply? Seeking Your Insights

Can anyone tell me whether the Leave Encashment attracts PF?

Thanks,
RAM

Hi Ram,

Leave encashment does not attract PF. It comes as an additional allowance when encashed and does not add up to the basic salary, which is the basis for PF.

Vani

Hi Vani,

Thanks for your reply. I had spoken to one PF employee in Mumbai, and she told me that Leave Encashment attracts PF. However, I am waiting for more details regarding the same from her. I shall inform you if any amendments have been made after 2003.

Regards RAM

Hi,

Yes, the PF authority is right. Leave encashment attracts PF. I have posted the PF reference in my earlier reply on the same. Kindly check that out.

Anu...

Hi!

Yes, leave encashment attracts Provident Fund. It is actually based on an old Supreme Court judgment, but it is only now that the PF authorities have woken up and started giving it proper publicity. I shall let you know the case details. But this raises certain important questions: (i) whether the employer will be required to give a matching contribution on the leave encashment amount; (ii) Employees can accumulate and encash their leave at the time of retirement up to 300 days (exempt from tax under IT Act up to 300 days). Will PF be deducted on this, and is the employer required to make a matching contribution? Can anyone enlighten me?

Best Regards, Learner

Hi All,

Please be informed that as per the latest communication (September 9, 2005) from the Employees Provident Fund Organisation, the matter of recovery of PF contributions on Leave Encashment prior to 1st May 2005 has been kept in abeyance. It will be presented at the next meeting of the Central Board of Trustees for deciding the cut-off date for enforcing PF contributions on leave encashment paid on or after 01.10.1994.

Now, the PF authorities have been instructed to enforce the recovery of PF contributions on Leave Encashment paid on or after 1st May 2005.

Thank you for the information, Anu.

Best Regards,
RAM

Dear Ram,

Yes, encashment of leave attracts EPF. The September communication in this regard by EPF authorities is also very clear. The main thing that needs to be looked into is at what time the encashment of leave attracts EPF deductions.

Generally prevalent principles of leave encashment are:

1. An employee opts for the encashment of leave balance with him as per the company rules.
2. Companies provide encashment against the leave at the close of the leave year or financial year.

There is another method of leave encashment that has been correctly put forward, that is, encashment of leave at the time of retirement.

Under the first two clauses mentioned above, if encashment is being done, it is true that it attracts EPF deductions. The case that went up to the Supreme Court is also based on the above two clauses. Under these clauses, leave encashment becomes a part of salary and falls under the definition of wages as per section 2 of the EPF & MP Act, 1952.

Previously, there was no practice of encashing the leave. The only principle applicable was that it would be encashed at the time of resignation or retirement. Any amount paid as retirement benefits does not attract EPF contributions. Even the Income Tax has also given exemption from the deduction of TDS on encashment of leave at the time of retirement subject to a certain limit. The principal Income Tax department followed was of retirement benefits.

EPF authorities were also following the same method, but certain employers started this practice of encashment to reduce their carried forward burden.

So, if your leave policy does not allow encashment of leave before retirement or resignation, then the amount paid against encashment of leave at the time of retirement or resignation does not attract EPF deductions.

I hope now you will be clear on the basic background of the clarification put forward by EPF authorities.

Regards,

Anil Anand

Dear Mr. Anil,

We have a policy in place wherein the employees can accumulate leaves up to 180 days, and any accumulation beyond that date has to be encashed or availed, or else the same will get lapsed. Likewise, the employee should keep a minimum of 60 days while encashing. Because of this policy, the employees are forced to encash their PL.

In view of the above, please let me know the following:
1) Whether Leave encashment at the time of Retirement attracts PF?
2) Whether Leave encashment at the time of resignation attracts PF?
3) Whether Leave encashment at the time of separation (if the company decides to reduce the staff) attracts PF? And how about Termination?

I believe the PF is always calculated on basic Salary, including the DA and retaining allowance if any.

Best Regards,
RAM

Hi Anil Anand,

The nil PF contribution liability for the encashment of leave during retirement is understood. But what about during resignation? Can anyone shed some light?

Regards, Harikeyel

Dear All,

Please enlighten me with the relevant section/case law, including Supreme Court decisions, to update me on the matter, please.

Regards,
P.K. Garg
9871388380

Yes, it attracts PF on the leave encashment. Recently, the PF Department has issued a circular on 9th Sept '05. If you want to see a copy of the circular, please refer to LLR Nov '05, page number 289.

Regards, Vikram Singh 09810102421 vikramlamhe@gmail.com

Hello all,

Nandu here. I am in a leading software industry. Here we have a policy wherein an employee can opt for leave encashment only at his resignation or retirement.

To my knowledge, recently a day before, a new policy has been disclosed in the PF section, but it was regarding reducing the interest rate.

Please update me or correct me that the leave encashment does not attract EPF when it is done at the time of resignation or retirement.

Waiting for your response on my last para.

Thanks,
Nand Joshi

Hello All,

It is a very clear concept. I will try to make you understand to a certain limit.

Case 1: If leave encashment is done at the time of resignation, then it will not reflect/attract to the EPF. It is a separate entity. Still, EPF will be calculated based on the Basic Salary, etc.

Case 2: Now, some companies have a policy that allows you to maintain a leave balance up to a certain limit. For example, you can have a leave balance of up to 180 days. If, by chance, your leave balance exceeds 200 days, then in this scenario, the excess 20 days of leave will be considered as such, and you will be asked to choose one of the following options:

Option 1: Avail all the leave.

Option 2: Transfer the 20 days of excess leave to your salary account. This will attract EPF deductions as it will be treated as part of your salary amount.

Therefore, it is advisable to utilize the leave and you can also claim LTA for the period of 20 days from your organization. Alternatively, you may request your organization to credit a certain amount of leave balance to your salary account.

I hope this clarifies up to a certain extent. Please let me know if you need any further information.

Nand Joshi

Hi Vikram,

"Yes, it attracts PF on the leave encashment. Recently, the PF Department has issued a circular on 9th September 2005. If you want to see the copy of the circular, please go through LLR Nov '05, page number 289."

Please tell us what LLR Nov '05 refers to, as mentioned by you. I also take this opportunity to thank all the members of this discussion group for enlightening us, with special credit to Anil Anand.

Regards,
Rajat

We are deducting PF contribution for leave encashment and depositing both the employee's and employer's contributions. However, we are unsure whether leave encashment will attract PF contributions at the time of full and final settlement, in the form of the final payment upon separation from services.

Regards,
Nirmal

Dear Sir,

We are deducting PF contribution from leave encashment and depositing both the employee's and employer's contributions. However, it is unclear to us whether leave encashment will attract PF contributions at the time of full and final settlement in the form of final payment upon separation from services. Please clarify this for us.

Thanks and Regards,
Nirmal

As per 2(b) of EPF Act,1952 “Basic Wages” means all emoluments which are earned by an employee while on duty or (on leave or on holidays with wages in either in 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

(i) the cash value of any food concession

(ii) any dearness allowance, HRA, 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;

(iii) any presents made by the employer

Every employee is entitled to encash leave as per the rules. In view of the definition of “basic wages”, if an employee who has earned leave goes on leave, his salary or wages can obviously fall within the term “basic wages”. There is , therefore , no good reason to hold that the even of his not availing the leave but encashing it, the amount which he gets in such encashment should be excluded from the basic wages within the definition of “basic wages” as given in section 2(b) of the Act. Recently in West Bengal RPFC has issued a circular on this.

Hi Anuradha,

The document is fine and quite helpful. But I just want to know on what basis the PF contribution will take effect. The government has not provided any clarification regarding this.

Thanks

Hi to All,

I am closely observing this topic and the more I read this, the more queries I have. To put the things forward, let me ask the question directly:

a) Leave Encashment can be in 3 scenarios i.e. i) Upon Leaving, ii) Upon Retirement, iii) Excess encashment as per Co. policy... now will PF get attracted in all three cases?

b) If PF is deducted (assuming in all or either of the above-mentioned cases), will the Company also match the same contribution? If yes, will it be bifurcated into 8.33% & 3.67% (like we do in a normal PF case)?

c) What is the tax treatment for all three scenarios mentioned in point a)? If tax is deducted (assuming in all or either of the above-mentioned cases), will the taxable part be post PF or pre PF? For example, if PF encashment value is Rs. 300, and PF value is say 36, will the taxable part be 300 or 300-36?

Kindly reply.....

Thanks,
Vineet