Do Salary Arrears and Leave Encashment Impact Your PF Contributions? Seeking Advice

Greetings to All Seniors, Please update if salary arrears affect my PF account. Also, does leave encashment affect PF deduction? Kindly update.

Regards,
Ruchi

Hi Ruchi, the PF deduction only includes Basic, DA, and retention allowances. Apart from these components, there is no other element that will affect the PF.

Yes, PF & ESIC shall be in effect on arrears salary. If, in case, last month you got paid less due to any circumstances, and your company paid you for those days in this month, then those days' PF, ESIC (if applicable) shall be attracted on those days' salary, and the employer needs to contribute on the same.

The difference amount of PF & ESIC needs to be paid in the prescribed month along with your respective month's salary. There should be no deductions attracted on Leave Encashment. If you can elaborate on the case, it would lead to a better understanding, and members can also advise you in an appropriate way.

Regards

With regard to your first query, yes, PF contributions will be payable on arrears in salary/wages only on Basic, DA, and Retention Allowance, excluding other allowances.

As for your second query, no, PF contributions will not be payable on leave encashment.

Hope this clears your doubt.

The deduction of Provident Fund will definitely attract the salary arrears and leave encashment as well. These two are nothing but a part of the salary. Now the question arises as to whether these payments are included in the monthly salary sheet or to be paid separately. If they are included in the monthly salary sheet, then the PF ceiling needs to be taken care of. If not shown in the salary sheet and instead being displayed in a supplementary pay sheet, then again, you have to take care of the PF ceiling.

Regards,
Adoni Suguresh
Sr. Executive (Pers, Admin & Ind. Rels) Rtd
Labour Laws Consultant

I am making a little correction here. The deduction of Provident Fund will definitely be associated with the salary arrears and leave encashment as well. These two components are nothing but parts of the salary.

Considerations for Salary Sheet Inclusion

Now, the question arises whether these payments are included in the monthly salary sheet or to be paid separately. If they are included in the monthly salary sheet, then the PF ceiling needs to be taken into consideration. If they are not shown in the salary sheet and are instead displayed in a supplementary pay sheet, then again, you have to take care of the PF ceiling.

I need clarification on leave encashment as you mentioned. Can you provide the clause or any section regarding how leave encashment relates to PF?

Your arrears salary is effective on your PF account, and arrears salary is deducted with PF and ESIC both. However, Leave Encashment will not be effective on your PF and ESIC. PF has particular slabs of Basic+DA, but Leave Encashment depends on your company policies and is considered in NCP Days; that is why it is not deducted.

Regards,
Basavaraj HR Executive

As per the Supreme Court order dated 12.03.2009 in the Manipal Academy vs. CPFC case, PF is not required on leave encashment.

I do not think you should be facing trouble with PF if you have company closure; also, you will be paid in full. These are two separate things.

Thanks,
Regards
[Phone Number Removed For Privacy Reasons]

I would be thankful if you could kindly provide the Supreme Court order on PF deductions regarding leave encashment in the case of Manipal Academy vs. CPFC for the information of all readers. If I remember correctly, in the year 2004, Manipal vs. RPFC resulted in the judgment that PF contribution is applicable in the case of leave encashment. I will search for the order. In the meantime, I am expecting the Supreme Court Order.

Regards,
Adoni Suguresh
Labour Laws Consultant

I would like to enlighten here that PF deduction will apply to arrear salary/wages. PF deduction will not apply to leave encashment.

For ESI:
The liability towards payment of contribution accrues only from the month in which the increment is sanctioned, an agreement is entered into, an increase is announced, a judgment is pronounced, or a decision is taken, as the case may be. There is no need to pay any contribution on the arrears pertaining to the period prior to the month of declaration/announcement/agreement, as the case may be.

Regards,
J. Basak

Reading the responses in this thread, it is not surprising if any reader is confused. What is the correct answer here? All the participants are learned members of this forum. How to conclude this thread, can anybody tell this? It is not appropriate to conclude any thread by an ordinary member like me.

Still, I would state that both the questions asked here are basic in HR. The second one has been discussed in this forum many times before. It is now a well-established law not to deduct PF on leave encashment. I appreciate the answers provided by two members, which are correct.

It is also not appropriate to remind learned members to verify before replying to certain basic questions like this. I am sorry to say this. Our posts are read by many across every corner, and they assume they are correct because they are written by learned HR professionals.

I beg your pardon for this post of mine.

I am sorry to point out that your above statement is not correct regarding ESI on arrears. The correct answer has been provided by Mr. J. Basak. It is a well-established law and has been discussed many times earlier in this forum.

Dear Ruch,

PF is contributed on (Basic + DA + Retention Allowance), and it is applicable to arrears salary. Leave encashment is not deducted from PF because leave encashment depends on company policy.

Thank you.

I had a salary arrear for the last 4 months. Simultaneously, an arrear for EPF was also deducted. However, after that, my company is repaying my deducted arrear EPF, stating that no arrear on EPF can be deducted. Can anybody help me with this situation by stating under which act of EPF we can deduct the arrear EPF when arrear salary was given?