Is Our Contractor's PF Deduction Practice Legitimate or Misleading? Seeking Advice

Contractual Agreement for Manpower Hiring

A contract for the hiring of manpower is established between my company and the contractor. The contractor pays the salary to his employees, and my company reimburses the same, including the employer's Provident Fund (PF) and a commission on wages.

The basic wages of his employee are Rs. 7,254/-, and he is deducting Rs. 870/- on account of PF. However, he is depositing only Rs. 780/- to the PF Department, which is limited to 12% of Rs. 6,500/-.

Kindly suggest if he is engaging in the wrong practice or if there is any rule for the deduction of PF not exceeding Rs. 780/-, which is 12% of Rs. 6,500/-.

If the amount is above Rs. 6,500 (assuming Rs. 6,500 is 60% of their total salary), employees are not eligible for PF. Employers do not need to contribute to PF for those employees. On the higher side, if 12% of Rs. 6,500 is Rs. 780, then the employees' contribution on all heads, including EPS, EPF, EDLI, Admin Expenses, etc., will be only Rs. 884.65.

Please correct me if I am wrong.

Regards,
Hrkpati

Understanding PF Contributions Under the PF Act

As per the PF Act, a company is covered under it if it has 20 or more employees. Even if the employment in such covered companies falls below 20 at any given point in time, the company continues to be covered under the act and continues to contribute.

Similarly, if an employee has a basic salary of less than ₹6,500 during their joining, they become covered under the PF Act. Even if their basic salary rises above ₹6,500, they continue to be covered under the act and continue to contribute (a minimum of 12% of ₹6,500, which amounts to ₹780 per month).

For your query, Lokesh, if the employee was covered under the act, they would continue to do so. Both the company and the employee will contribute a minimum of 12% of ₹6,500 (₹780) towards the PF Act.

Some companies do contribute 12% of the actual basic salary, which is ₹870 in your case. However, whatever amount is deducted from your salary or is reflected on the salary slip ought to be deposited in the PF account.

Seniors, kindly reflect.

Deducting PF from wages and not depositing it to the authorities is a crime. EPF is eligible for those whose basic wages are less than Rs. 6500/- and for those whose basic wages are above Rs. 6500/-, EPF is restricted up to Rs. 6500/-. Any EPF deduction above Rs. 6500/- is purely the decision of the employer.

Many employers include EPF in the CTC, hence they deduct and deposit it to the EPF authorities. For amounts above Rs. 6500/-, where EPF is deducted, the employer's contribution does not need to be added. This can be treated as VPF. If the deduction is made from wages and not deposited to the authorities, it is considered a crime. Please contact the contractor and explain the same.

Regards,
V K Rao

As per the law, the employer is bound to pay 12% of ₹6500 (in case the salary is above ₹6500). However, at his own will, the employer can contribute any amount more than ₹6500. Also, if he is showing a deposit of more than ₹6500, he is bound to contribute that amount.

That is what most of the contractors do (no offense to those who are generous and honest to their employees). That is another way to save money. What they generally do is take voluntary PF from employers (on the actual basic) and deposit the EPF calculated on the maximum cap of the basic salary. They also make different compliance sheets for the employer and the PF department.

I have seen some companies doing so. Your contractor might also be doing that, but neither is it legal nor ethical towards an employee.

Thanks!
Saunee

If the contractor is deducting an amount of Rs. 870, then he should submit the same amount to the PF department. In my opinion, you should fight for the rights of employees, ensure compliance, and file a complaint against him if he is not doing so. I am also fighting for the same, and I have seen many contractors who do not submit the PF amount but still deduct it from employees.

Link to article: https://www.citehr.com/471927-problem-partiality-human-resource.html

Regards,
Kashyap

Understanding PF Contribution Limits

The PF rate of 12% is only a minimum. An employee can contribute more than this amount. However, employer contribution is typically restricted to 12% in practice. Paying more than 12% towards PF for employees will not result in any tax exemptions for either the employees or employers under various provisions of the Income Tax Act.

Notwithstanding this provision, if the amount deducted from the employee exceeds the stipulated 12%, then that surplus should be promptly remitted to the employee's PF Account. Nevertheless, the employer could choose to limit the contribution to 12% only and is not obligated to credit any excess amount deducted from the employee towards PF.

Please correct me if I am mistaken.

Regards,
M J P Devadoss

If an employee's basic and DA exceed Rs. 6500, is he exempted from PF deduction?

Regards,
Ajay

An employee is covered under the PF Act when their basic salary plus DA (during the first job) is less than or equal to 6500. If, after a period of time (in the same job or during a job change), the employee's salary is revised and their basic salary plus DA is increased, crossing 6500, the person continues to be covered under the PF Act (unless employed by a company not covered under the PF Act). They continue to be covered until retirement, death, or as explained in the above scenario.

I hope this clarifies your doubt.

Regards.

Understanding PF Contributions for Contractor's Workmen

If the wages/pay sheet of the contractor's workmen reflects the PF in the actual basic pay, i.e., Rs. 870/- (12%), obviously the employee PF contribution must be deposited as Rs. 870/-, EPS Rs. 541/-, and employer PF Rs. 329/-, with an additional Rs. 19/- (1.1%) for EPF admin charges to be remitted in the PF part. The EDLI can be paid for the basic of Rs. 6500/-, i.e., Rs. 33/- as EDLI (0.5%) and charges for EDLI Rs. 0.65/- (0.01%).

If the contractor is claiming the full amount after depositing the partial, then you need not pay the full.

As a matter of fact, the employer PF part is normally a reimbursement and not paid in advance. Please check the Letter of Intent (LOI) issued to the contractor and act accordingly.

Thank you for your message. My contractor is employing only five workers whose basic salary is less than Rs. 6,500 per month. Is it compulsory to deduct PF? The PF authority is not allotting a PF code because the contractor is employing fewer than 20 workers. Please guide me on this.

If your contractor is unable to register his establishment for PF, then it is the responsibility of the Principal Employer (you) to deduct from the bills of the contractor and remit the same in your code, as the responsibility of compliance lies with the Principal Employer. As per the Work Order, the deduction of Employee and Employer PF contributions will be decided.

Let me know if your organization has only one contractor. If there is more than one, the other contractor should have a PF code number. You can use that code number to pay the contractor's PF contribution.

If the contractor responsible for paying the PF is liable to another contractor who is working on your premises, both contractors should provide a letter regarding the same.

There is no right to contract workmen for claiming a permanent job, even if the PF contribution is paid through the PF code of the principal employer.

Regards,
V K Rao

As you said, your "Contractor is paying salary to his employees, and my company is reimbursing the same with employer PF and commission on wages." That means your company is reimbursing 13.61% to the contractor. If your contractor is deducting 12% on Rs. 7254/-, i.e., Rs. 870/-, and depositing only 12% on Rs. 6500/-, i.e., Rs. 780/-, only, that means he is committing fraud of Rs. 90/- from employees' shares.

Similarly, your company is reimbursing 13.61% on Rs. 7254/-, i.e., 987, but only depositing 13.61% on Rs. 6500/-, i.e., 885/-, means fraud of Rs. 102/-.

So, in total, he is drawing Rs. 90 + Rs. 102 = Rs. 192/- per head on account of PF (excluding profit).

As per the PF Act, only 8.33% (employer's share) of Rs. 6500/-, i.e., Rs. 541/-, goes to the Pension Scheme, and the rest amount goes to the Provident Fund, even if the wages of the employees go above Rs. 6500/-. In your case, it is Rs. 7254/- (Employee's total share of 12%, i.e., Rs. 987/-, will go to PF, and from the employer's share of 12%, only Rs. 541 will go to the Pension scheme, and the rest Rs. 446/- will go to PF).

Thanks & Regards