PF Ceiling Change: How Should We Calculate Salary Breakups for Accurate Deductions?

Dear All,

PF Ceiling Amendment and Salary Breakup Concerns

This is regarding the recent amendment we received related to the PF ceiling increase from ₹6,500 to ₹15,000. Due to this change, we are about to rework the salary breakup for our employees. When we were about to implement it, one of our colleagues sought advice from the PF department. According to the concerned PF person's statement, "pertaining to salary breakups, whatever gross salary an employee receives should be considered for PF, where 40% of HRA (Non-Metro) could be exempted from it."

My concern is that, as per the law, we need to deduct PF from the basic salary and DA, not from the gross salary. Also, regarding HRA, it should be calculated from the basic salary and not from the DA. Could any of you provide clarity on this so that we can implement it accordingly with immediate effect?

Requesting you to look into this and respond at the earliest.

Regards,

Please note that PF should only be deducted on Basic and DA, not on any other component or gross.

Thank you.

Important Update on EPF Coverage Ceiling Increase

To all my friends whose basic salary is between 6,500 and 15,000, and who have not yet had PF deductions in your CTC, there is important news for you.

EPFO has increased its coverage ceiling from 6,500 to 15,000. With this increase, the take-home pay of employees with a basic salary between 6,500 and 15,000 will 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 share of 12% will be calculated in the CTC or as an extra burden taken by the employer depends on the employee and employer's job agreement.

This is a compulsory Indian social security act obligation for those employees who work in India. No one will be exempt from it.

CTC calculation is a pay agreement between an individual employee and employer; it is not a statutory obligation by the government. Only the minimum wage is an 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 added burden to the employer, meaning the CTC has increased (good news for employees).

Scenario 2: CTC Not Increased

CTC will be adjusted to cover the entire 24% EPF, meaning both employee and employer shares will be deducted from the employee's CTC and paid to EPFO for those whose basic is below 15,000. This means 24% will be deducted from the employee's take-home pay. The government will not interfere in this as long as 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.

You have asked the PF department the wrong question at the wrong time. There is a raging dispute about what constitutes basic under the PF Act.

There have been court decisions, specifically in Rajasthan and more recently by the Allahabad High Court, which decided that allowances paid to all or a group of employees every month and computed on a fixed basis, excluding allowances specifically excluded (such as overtime and HRA), are part of the basic. The Allahabad High Court decision is very detailed and based on premises that are likely to be upheld by the Supreme Court.

The PF officer is considering that decision and giving his "advice" on that basis—take gross less HRA.

However, in view of multiple contrasting decisions, the Supreme Court has taken all pending cases into its own jurisdiction and will give the final verdict. The PF department had issued a notification implementing the Allahabad HC decision, but that was later put on hold by the ministry in view of the pending SC decision.

So, under current rules, you have to pay PF on basic + DA.

Having said that, please remember that the SC decision will be clarificatory in nature (not laying down the law but clarifying that the law was all the time) and therefore applicable with retrospective effect.

My question to you is, why do you want to change the pay structure because of the increase in the PF ceiling from 6500 to 15000? There is no effect on an employee's salary; the only effect will be on the employer's administrative charges (increase in EDLI contribution). Below are the explanatory calculations:

EDLI Calculation

EDLI will be calculated at 0.5% of the Pension wage, currently Rs. 6500. If it is increased to Rs. 15000, we need to calculate 0.5% on Rs. 15000, and it also applies to the admin charges of EDLI at 0.01% on Rs. 15000.

Due to this, there will be an impact on employer EDLI contributions:

1. The difference amount will be added to the EPF amount of 3.67%, as before.

If Basic is Rs. 20000 (Greater than Rs. 15000)

- EPF Contribution from Employee: Rs. 2400 (12% on Basic 20000)
- EPS Contribution from Employer: Rs. 1250 (8.33% on the maximum limit Rs. 15000*)
- EPF Contribution from Employer: Rs. 1150 (3.67% on 20000 + the difference amount of 416)

2. If the Basic salary is less than Rs. 15000, then the Pension Contribution would be 8.33% on Basic and the PF Contribution from the employer would be 3.67% on Basic. There will not be any difference amount to add to the value of EPF (3.67%).

If Basic is 10000 (Less than Rs. 15000)

- EPF Contribution from Employee: Rs. 1200 (12% on Basic 10000)
- EPS Contribution from Employer: Rs. 833 (8.33% on Basic 10000)
- EPF Contribution from Employer: Rs. 367 (3.67% on Basic 10000)

As the new EPF notification is applicable from September 1st, 2014 onwards, and the payroll process will be completed after September 30th, I hope you will have time to make a decision on changing the pay structure.

Kindly share the reason for changing the pay structure when there is no effect.

Dear Mr. Pavan Kumar, With reference to your reply, I have a small doubt. If the Basic pay is Rs. 20,000 (greater than Rs. 15,000), the EPF contribution from the employee would be Rs. 2,400 (12% on Basic 20,000). It's not mandatory; the employer can limit it to Rs. 1,800 only (12% on 15,000). The EPS contribution from the employer would be Rs. 1,250 (8.33% on the maximum limit of Rs. 15,000*). The EPF contribution from the employer would be Rs. 1,150 (3.67% on 20,000 + the difference amount of 416). It's not mandatory; the employer can limit it to Rs. 551 only (3.67% on 15,000). Please let me know if I am wrong.

Regards

There is no mandate to calculate 12% on the actual basic (in case of more than 15,000). We can limit it to 15,000, or if the employer wants to benefit the employee as per their policy, they can calculate on actuals. The example I have taken is from the organization where I am currently working, which pays based on actuals.

Thanks & Regards,
Pavankumar P