Can an Employee and Employer Use Different PF Contribution Bases? Seeking Clarity on Rs 6,500 Ceiling

Case for Guidance on PF Contribution

An employee whose PF was earlier deducted on Rs 10,000 (both sides 12%) is now lowered to the statutory ceiling of Rs 6,500 (i.e., both sides to deduct 12% on Rs 6,500). The employee has agreed to this but states that his PF contribution should still be deducted on Rs 10,000, while the employer should deduct on Rs 6,500. How is this possible since, as per my knowledge, there cannot be two different bases (Rs 6,500 & Rs 10,000) for calculating EPF, Pension, and EDLI?

Please shed some light on this case.

The employee's point of view can't be settled as EPF contributions have to be equal; therefore, the base should be equal. An employee cannot deduct 12% on 10k, and an employer cannot deduct on 6.5k since it is not allowed in the EPF Scheme. Please educate your employee on this aspect.

Regards

There is no illegality in it. The employees can ask the employer to deduct 12% of 10,000, and at the same time, the employer can contribute 6,500. In the case of voluntary contribution also, the same thing happens. Therefore, you can allow it.

Regards,
Madhu.T.K

Dear Madhu Sir, Paragraph 29(2) states that the contribution payable by the employee under the scheme shall be equal to the contribution payable by the employer. This paragraph cannot be applied if there are two different bases to calculate EPF.

For example, in the scenario provided, the employee pays Rs 1200 on Rs 10,000, while the employer's liability is only Rs 780 on Rs 6,500. Since Rs 541 must be maintained in the EPS account, the remaining amount out of Rs 780, i.e., Rs 239, is put in EPF. This Rs 239 (3.67% in EPF) and Rs 541 (8.33% in EPS) should equal 12% (in this case, Rs 1200) of the employee's contribution, which is not the case. Therefore, the employee's share also has to be deducted on Rs 6,500. Yes, if the employee wishes, they can increase their VPF up to 100% of Rs 6,500, which is permissible anyway.

I hope you agree with this clarification.

Thank you.

Sorry, I do not agree with it because the provision to scheme 29(2) states as follows:

Provided that in respect of any employee to whom the Scheme applies, the contribution payable by him may, if he so desires, be an amount exceeding 12 percent of his basic wages, dearness allowance, and retaining allowance (if any) subject to the condition that the employer shall not be under an obligation to pay any contribution over and above his contribution payable under the Act.

That means the employee's share need not be equal to the employer's share. It is only a mandatory provision that at least an equal share should be contributed by the employee also.

Regards,
Madhu.T.K

I think you are looking at it from a Voluntary PF angle, wherein I totally agree that it can be over and above 12% for the employee. But the base salary on which both sides have to contribute cannot be different. VPF in the above case can be exercised, but on Rs 6,500/- only and not Rs 10,000. If one base salary is not followed for calculating both sides of PF, there would be a variance of 3.67% (the difference between EPF and EPS). Also, Admin charges (1.10%) can't be calculated on two bases. We have to have one base.

Calculation on Different Base Salary:

- Rs 10,000 x 12% = Rs 1,200 (Employee)
- Rs 6,500 x 12% = Rs 780 (Employer, out of which 8.33% or max Rs 541 goes to EPS, and the remaining Rs 239 goes to EPF)

Here you can see that both contributions are not equal.

Calculation on One Base Salary:

- Rs 6,500 x 12% = Rs 780 (Employee)
- Rs 6,500 x 12% = Rs 780 (Employer, out of which 8.33% or max Rs 541 goes to EPS, and the remaining Rs 239 goes to EPF)

As you can see, both contributions are equal.

Calculation When the Employee Chooses VPF (Say 20%) on One Base:

- Rs 6,500 x 20% = Rs 1,300 (Employee)
- Rs 6,500 x 12% = Rs 780 (Employer, out of which 8.33% or max Rs 541 goes to EPS, and the remaining Rs 239 goes to EPF)

The above case is OK even if both sides are not contributing the same amount since the employee has chosen the VPF option.

The point I want to drive is that there can't be two bases while calculating contributions. It will create a reconciliation issue, and even the EPF software doesn't have the provision for two different bases. I totally agree with your VPF point, but even that has to be on one base salary. It is not possible that the employer is contributing on one salary base and the employee on another. I hope you are getting my point of discussion.

Regards

Understanding Administration Charges and PF Contributions

Administration charges are paid based on the salary on which the provident fund is contributed, which needs to be managed by the EPFO. In this case, it should be based on the salary as per the employees' contribution. At the same time, EDLI and administration charges on EDLI are calculated on the basis of a salary subject to ₹6,500 per employee. This means that even if both employees and employers are contributing on a higher salary rather than ₹6,500 per employee, there can be two bases: one for the PF contribution part and another for the Pension fund contribution, EDLI, and its admin charges.

I know that this is not a case of voluntary contribution because VPF is a percentage higher than 12% on salary. In the present case, the rate of contribution remains the same, i.e., 12%, but only the PF qualifying salary changes from ₹6,500 to ₹10,000. The very proviso to para 29(2) is to permit employees to contribute PF on a higher amount of salary, holding at the same time that the employer is under NO OBLIGATION to pay the same amount as calculated on such higher salary. That does not mean that the employer should not contribute on a higher salary. Employers can contribute on a higher PF qualifying salary, and there are many companies that follow this practice.

If we have two PF qualifying salaries, that is, the salary on which employees contribute and the salary on which the employer contributes, the calculation will not be easy, and we may not be able to apply direct formulas in an Excel file. We can put the salary on which employees contribute as the PF qualifying salary and work out the employees' share of contribution from those salaries. In payroll software, the same can be incorporated without difficulties. I have worked in such payrolls where we have two PF qualifying salaries: one for employees, which allows taking 12% on basic and DA without any limit, and another for employer contribution, which will not count any amount higher than ₹6,500.

Regards,
Madhu.T.K

I have worked with the official PF software provided by EPFO, and it does not have a provision for two base salaries. Also, barring VPF contributions, all other contributions (employer & employee side) are shown as equal.

Further to this, if you read Para 29(2) word by word, it appears that the employee's contribution is dependent upon the employer's contribution and not vice versa. Therefore, until there is no VPF contribution, both sides have to be the same.

Also, private software can only take one base salary for EPF and not two, as inquired from our vendor.

Since this topic has really fascinated me, it would be helpful if you could upload an Excel sheet to show how you will calculate all the contributions/charges with two base EPF salaries. Just 4-5 employee dummy data would suffice to make this point clear.

Looking forward to the above for the benefit of all our fraternity.

Regards

In my view, the proviso to 29(2) of the P.F Scheme 1952 does not speak of any contribution on a higher salary than Rs. 6500/-. What it says is only about the admissibility of contribution by the employee at a rate higher than 10% or 12% on the wages, as the case may be, but on the amount higher than Rs. 6500/-. Thus, the paragraph is misunderstood.

However, Mr. Madhu is right in saying that the P.F calculations can have two separate bases, one for the employee and another for the employer. The appropriate paragraph that covers the issue is Para 26-A. I invite your attention to the proviso to Sub-para(2) of Para 26-A, which states that even though an employee is entitled to pay a contribution on wages higher than Rs. 6500/- per month, the employer is not obliged to contribute on more than Rs. 6500/- per month. I trust this would settle the issue at rest.

Regards,
B. Saikumar
HR & Labor Law Advisor
Mumbai
[Phone Number Removed For Privacy Reasons].

Appreciate your joining this discussion since we all want to clear this confusion for the benefit of our fraternity. I am reiterating my views once again to which you may reply pointwise, if possible:

1. **Employee and Employer Contribution Equality:** Para 29(2) first line itself emphasizes that "it is the employee's contribution which shall be equal to the employer's contribution," and nowhere vice versa. So if contributions have to be equal, the base has to be equal. How can an employee contribute on 10k while the employer contributes on 6.5k? Only one base can be considered.

2. **Proviso to 29(2) Interpretation:** The proviso to 29(2) talks only about exceeding the percentage of 10/12% and not about two different basic salaries. In my opinion, it clearly signifies that only ONE base salary is being discussed (whether up to or above 6.5k), and only the employee's percentage on that base salary is subject to increase.

3. **Proviso to Para 26-A Emphasis:** The proviso to Para 26-A also emphasizes that "contribution for both member AND employer to be limited to Rs 6500" but nothing about two basic salaries.

4. **Practical Calculation Sheet Request:** All said and done, I am looking for a practical calculation sheet that can justify this. Since EPFO software also has provision for only one base salary, there is no way you can input two bases. I hope you can create an Excel sheet to present and clarify this point.

Looking forward to your inputs.

Regards

Dear Sunil, thanks for your response and your interest in resolving the issue. In my honest view, as well as the views expressed by the honorable courts of this country, the EPF Act is a beneficial and social welfare legislation and needs to be interpreted in a way that advances the objectives and spirit of the legislation. It being so, the various provisions of the P.F Scheme 1952 cannot be interpreted in isolation but in conjunction with one another so that one provision does not nullify the benefit accorded by another provision to the employee. Besides, if a provision consists of sub-paras and provisos, again, while reading that provision, these sub-paras shall not be read in isolation but in conjunction with one another.

Section 29(1) and Contribution Rates

Now, Sec.29(1) exclusively deals with the rate at which the contribution is payable by the employer and specifies such rate as 10% or 12% of the Basic + DA + retaining allowance, etc. Sub-Para (2) lays down that the contribution payable by the employee shall be equal to the contribution payable by the employer, meaning thereby that if the employer contributes at 12% of the wages, the employee too shall contribute at 12% of the wages. Then Sub-Para (2) again cannot be read in isolation as there is a proviso which controls Sub-Para (2). The proviso permits the employee to contribute at a rate higher than 10% or 12% of wages, but the employer is not obliged to contribute more than 10% or 12% as the case may be. There is Sub-Para (3) which is not relevant to the current issue.

Implications of Para 29(1) & Proviso and 29(2) & Proviso

Thus, the reading of Para 29(1) & Proviso and 29(2) & Proviso together (not isolated) imply that P.F contribution shall be payable at the rate of 10% or 12% of the stipulated wages. Though the employee shall contribute at the same rate as the employer, he can nevertheless contribute at a higher rate than the employer, but in that event, the employer is not obliged to contribute more than 10% or 12% of the wages. Thus, you may observe that even in respect of the rate at which the contribution is calculated, there can be two different rates, i.e., one for the employee and another for the employer.

Issue of Contribution on Wages Higher than Rs. 6500/-

The issue in this thread of discussion is not with reference to the admissibility of calculating contribution at a higher rate for the employee but the admissibility of calculating at the same rate (12%) but on wages higher than Rs. 6500/- p.m. The relevant provisions, in my view, that cover this issue are contained in the proviso to Sub-Para (2) of Para 26-A, which states that where the monthly wages of an employee exceed Rs. 6500/- p.m, the contributions payable by him and the employer shall be restricted to Rs. 6500/- p.m. However, this proviso is not to be read in isolation as it is subject to sub-Para (6) of Para 26, which states that the P.F Authority can permit an employee to contribute on more than Rs. 6500/- (I regret that I have forgotten to refer to Para (6) of 26 in my earlier post, which would have made things more clear). Thus, Para 26(6) and Proviso to 26-A read together imply that though an employee's and employer's contribution is restricted to Rs. 6500/- p.m, an employee nevertheless can contribute with the permission of the P.F authority at wages higher than Rs. 6500/-, and in that event, the employer is not obliged to contribute on more than Rs. 6500/- p.m.

Thus, in order to have a complete understanding of the issue of contributions, one needs to read Paras 26, 26-A, and 29 together but not in isolation. This is my view and interpretation.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Dear Saikumar, Thank you once again for sharing your insightful views! The points you mentioned have been duly noted, and I understand from your comments that there is a possibility of two bases. However, one crucial question remains unanswered:

The Primary Concern: Calculating Administrative Charges

1) The primary concern is how to calculate administrative charges even when considering two bases. Since admin charges must be deducted based on a single base, the dilemma lies in choosing the appropriate base. Additionally, as mentioned earlier, the EPFO software only allows for one base salary. How can this limitation be addressed?

I am now convinced about the potential of having two bases, and I appreciate your and Mr. Madhu's assertive input. If we can resolve this particular issue, it would greatly benefit our community.

Regards,

Administrative Charges on Higher Wages

With reference to administrative charges, I once again draw your attention to Sub-para (6) of para (26) of the P.F. Scheme, which states that the employee is permitted to contribute on wages higher than Rs. 6,500/-, provided the employer undertakes to pay administrative charges at the stipulated rate on such higher wages. Thus, if the employee is willing to contribute at 12% of Rs. 10,000/-, the employer shall contribute administrative charges at the stipulated rate on Rs. 10,000/-.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Dear Sainath, Agreed to your point, but what about EPFO software which doesn't have provision of 02 bases? Anyway, I have had a word with the local IT people from EPFO and they seem to be puzzled about this. They will let me know on this facility if it exists and I will update this thread accordingly.

Thank you & Regards

The employer is not wrong. If an employee contributes Rs. 10,000, the employer can limit their statutory liability to Rs. 6,500. Just check the employee details you need to fill before uploading the monthly ECR. The provision is available there. Additionally, the employer can choose to contribute more to a specific individual or group. That's at the employer's discretion.

You have complicated the matter for yourself and confused yourself by thinking within the confines of the software. The easiest way out is to consider the difference as voluntary P.F. and process the payment accordingly. That way you don't have two different salary slabs. Hope this helps.