Navigating New PF Deduction Rules: How Should Employers Handle Employee Contributions?

Handling PF Deductions Under New Notification

As per the new PF notification, employees receiving a basic pay of Rs. 15,000/- are now covered by PF contributions. Previously, this limit was Rs. 6,500/-.

In such a case, how should we handle the PF deduction? For instance, if the CTC is 3.12 LPA and the monthly take-home pay after deductions is Rs. 25,000/-, with a basic salary of Rs. 12,000/-, previously not covered under PF, we now need to deduct PF from her salary. She has been with the company for the past 2 years.

Can we deduct both the employee and employer shares from her salary, considering we mentioned Rs. 25,000/- as her CTC in the appointment letter?

How will such employees be treated in your company? Will employees bear the burden of the deduction (both shares or one share), or will the entire amount be covered by the company?

Kindly advise.

Thanks,
Jagriti

I have the same query. Also, to add more details: If an employee has a monthly gross above ₹25,000 but his basic salary is below ₹15,000 and above ₹6,500 (as per the earlier slab of deduction), and he has been working with the organization for 4 years but is not willing to have the PF deduction, can his basic be raised to ₹15,001 or more so that he does not fall under the PF slab?

After the new amendment, if any employee's basic + DA is below ₹15,000 (whether the employee is present or existing), then PF contribution is mandatory. If it's more than ₹15,000, it is optional.

Earlier, she was not covered under PF, so there was no deduction for that. But now we need to deduct PF from her salary. She has been with the company for the past 2 years.

Yes, it will apply to existing employees as well. You need to deduct her PF contribution from the 1st of September.

Yes, it is necessary to deduct P.F. However, to be fair to the employee, the employer also needs to contribute. It is not good management practice to deduct both contributions from the employee.

Thank you.

Employer's Contribution to PF: Legal Guidelines

It has been very clearly provided in the PF Act that the employer cannot reduce salary under any pretext to pay for PF or part thereof. So, you cannot deduct the employer's contribution from the salary of the employee.

Please remember that CTC as a concept has no legal standing and is not recognized in law. What the law recognizes is gross wages. Gross wages cannot be reduced. If you try to deduct the PF contribution of the employer from the employee's CTC, either you will be making an illegal deduction (if you are showing it in the payslip) or you will be reducing the gross salary. Both actions are not allowed.

Dear All,

Related to the PF deduction, the comments along the thread completely clarify that both deductions are not possible from the employee's monthly wage. Only 12% can be deducted from his current basic for the employee's contribution.

Apart from the above query, can anyone explain why an employee who is attaining superannuation next year, but whose basic is less than ₹15,000, will be liable for PF deduction? How is it going to help the employee? And why should he/she bear this burden at this point?

Regards

With the increase of the EPF coverage ceiling from ₹6,500 to ₹15,000, the take-home pay of employees with a basic salary between ₹6,500 and ₹15,000 will surely be affected (those who were not affected until August 31). Their take-home pay will be reduced.

12% (Employee share) on Basic has to be paid to EPFO from the employee side whose basic is ₹15,000 and below. Another 12% employer share also has to be given to EPFO, meaning a total of 24%. Whether the employer's 12% share will be calculated in the CTC or as an extra burden taken by the employer depends on the employee and employer job agreement.

This is a compulsory Indian social security act obligation for employees who work in India. No one will be exempt from it (for exclusions, refer to the EPFO Act).

CTC calculation is a pay agreement between an individual employee and employer; it’s not a statutory obligation by the government. Only the minimum wage is the obligation by the government.

Scenario 1: CTC Increased

12% of the employee share will be deducted from the employee, reducing their take-home pay. Another 12% share will be given by the employer, which is an additional burden to the employer, meaning the CTC has increased (happy for employees).

Scenario 2: CTC Not Increased

CTC will be adjusted to cover the entire 24% EPF, meaning both the employee and employer share will be deducted from the employee’s CTC and paid to EPFO for those with a basic salary below ₹15,000. This means 24% will be deducted from the employee's take-home pay. (The government will not interfere in this; it ensures that the minimum wage (Basic) is paid.)

Note: EPFO will pay 8.75% annual interest on your EPF money. It’s the best interest rate you can get today, so be happy with this change.

Legal Implications of Scenario 2

Please note: Scenario 2 is illegal. There is a very clear and specific provision in the act that states the salary of an employee cannot be reduced to pay part or whole of the PF dues. CTC is not recognized under any Indian law, so you need to ensure that the gross salary is not reduced. Under no circumstances can the entire 24% burden be loaded on the employee. At the next salary hike/increment, adjustments can be made to the CTC, but at the moment, it is not possible. If you are doing that, the PF department has the right to recover the 12% from you. Besides, it will be an offense under the Payment of Wages Act as being an illegal deduction.

Understanding CTC and PF Contributions

For your kind information, my organization and I are not operating like Scenario 2. We are not following the CTC system at all. We are paying Employer PF on the actual basic salary to all employees from the employer's pocket.

However, many companies are adhering to the CTC system. Before discussing these two scenarios, I mentioned that CTC was simply an agreement between the company and the employee. Legally, all these companies are providing minimum wages as per government regulations. Besides that, nothing is considered illegal.

In the CTC concept, CTC means the Cost to the Company, encompassing all expenses incurred by the company on the employee, including seemingly trivial costs like coffee consumed by the employee, which are factored into the CTC (e.g., meal passes).

In this scenario, the employer's share of 12% is also calculated as a Cost to the Company. As per Scenario 2, this is a legal practice, resulting in a reduction of take-home pay for employees falling under this scenario.

I reiterate that CTC is a mutual agreement between the company and the individual employee. As per regulations, minimum wages and employer contributions are being paid. My point is, for those falling under Scenario 2, their take-home pay will be impacted.

Kind regards

Section 12 of the PF Act

Please see Section 12 of the PF Act below:

Employer Not to Reduce Wages

No employer in relation to an establishment to which any Scheme or the Insurance Scheme applies shall, by reason only of his liability for the payment of any contribution to the Fund or the Insurance Fund or any charges under this Act or the Scheme or the Insurance Scheme, reduce, whether directly or indirectly, the wages of any employee to whom the Scheme or the Insurance Scheme applies or the total quantum of benefits in the nature of old age pension, gratuity, provident fund, or life insurance to which the employee is entitled under the terms of his employment, express or implied.

So, since wages are gross wages, you cannot bring them down directly or indirectly for payment of PF, or for any change in the amount of PF payable. Anyone who does that under the guise of CTC is making an illegal deduction, irrespective of whether the employee agreed to the concept of CTC.

Concept of CTC and Enhancement of PF Coverage Limit

CTC prior to enhancement of PF coverage limit
CTC after enhancement of PF coverage limit

- Basic: 10,000 / 10,000
- HRA: 6,000 / 6,000
- TOTAL MONTHLY Gross: 16,000 / 16,000
- PF DEDUCTION EMPLOYEE: 780 / 1,200
- NET TAKE HOME SALARY: 15,220 / 14,800
- EMPLOYER'S PORTION OF PF: 890 / 1,361
- CTC: 16,890 / 17,361

Therefore, take-home salary will be less, and CTC will increase. (Calculation has been made considering PF deduction only on the statutory limit).

Regards,
S K Bandyopadhyay
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As recommended by some of my friends, the assertion that CTC has no legal standing is absolutely correct. Nowadays, many organizations are even designing their pay packages based on CTC. It is also correct that employer contributions to PF and ESI cannot be deducted from an employee's gross salary.

Example of Pay Structure

Let's consider an example: Monthly gross pay of ₹14,000 (Basic - ₹8,000, HRA - ₹3,000, and other allowances - ₹3,000). Yearly gross = ₹14,000 x 12 = ₹1,68,000. ESI employer contribution = ₹7,980 per annum, Bonus as per act (20%) = ₹8,400 annually, Welfare benefits (canteen subsidy, tea, coffee, etc.) = ₹15,520 per annum. No PF deduction as an excluded employee. Total CTC before September 2014 (Before PF amendment) = ₹2,00,000 per annum. From September 2014 after the PF amendment, the employee is covered under PF, and the employer contribution to PF will be ₹13,065 per annum. Therefore, the new CTC will be ₹2,13,065 from September 2014. Previously, the take-home salary of the employee was the monthly gross minus ESI employee contribution minus PTAX if applicable. Now, the take-home salary will be the monthly gross minus ESI employee contribution minus PF employee contribution minus PTAX if applicable.

Challenges in Designing Pay Structures

Nowadays, it is really complicated to create a scientific pay structure considering minimum wage, PF gross, ESI gross, ITAX rebate pocket, variable pay, etc.

Thanks and Regards,

S K Bandyopadhyay

USD HR Solutions

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Provident Fund Deduction for New Employees with Higher Basic Salary

If a new employee's basic salary is more than ₹15,000/-, is it compulsory to deduct the provident fund or not?

Regards.

Dear All,

One of our employees is receiving a (Basic+DA) of over 15000/-, and their PF amount is being regularly contributed to the PF authority. However, they now wish to be exempted from this.

Is there any provision in the EPF Act for this?

Please assist me with this matter.

Regards, SHIVANAND

My basic 7540, and now the company tells me that the conversion in CTC. How much is my CTC figure, and also tell me about the 24% PF cut. Is it right or wrong according to government rules?

If the fixed CTC is 6.3 lpa, the employer's contribution to PF is 1800 INR. There is no mention of the employee's PF in the salary breakup. I just wanted to check if in the fixed CTC, both employer PF and employee PF contributions are deducted with tax, or only the employer PF is deducted. Once we leave the organization, are we eligible to claim both the employer and employee contributions to PF?