Is My New Salary Structure and PF Deduction Method Correct for Compliance?

I recently joined a private limited company in Andhra Pradesh. They don't have a salary structure, so I created one as below:

- Basic: 40% of gross
- HRA: 20% of gross
- Transport Allowance: 10% of gross
- Education Allowance: 10% of gross
- Special Allowance: 20% of gross

Question on Salary Structure

My question is, is the above structure correct? Also, currently, they are deducting PF at 12% of the Gross. Starting next month, I will have to change the PF deduction to be based on the basic salary. Will there be any queries from the PF office regarding why the contribution increased or not?

Thank you.

1. HRA, Transport Allowance, and Children Allowance are based on the basic salary, not the gross salary. In the case of Leave Without Pay (LWP), this should affect all allowances.

2. Special Allowances = (Gross - (Basic + Transport Allowance + Education Allowance))

Please let me know if you need any further clarification.

I also want to know about the salary structure. I have recently joined a software company with around 60 staff, and I am interested in understanding how to calculate PF, PT, and ESIC.

Thank you.

For PF on a basic salary below ₹15,000, it is 12%. PT will be as per the slab in your state, and for ESIC, the deduction on gross salary below ₹15,000 is 1.75%.

Dear Ramesh, I recently joined a private limited company in Andhra Pradesh. They don't have a salary structure, so I created one as below:

- Basic: 40% of gross
- HRA: 20% of gross
- Transport Allowance: 10% of gross
- Education Allowance: 10% of gross
- Special Allowance: 20% of gross

Is the Salary Structure Correct?

My question is, is the above structure correct? Or should it be different? As of now, they are deducting PF at 12% of the gross salary. Next month onwards, I have to change the PF deduction to be based on the basic salary. Will there be any query from the PF office regarding why the contribution increased or not?

Sorry for the previous incorrect comment of "No value added," it was a mistake.

Considerations for PF Deductions

1. If the company is deducting PF on the gross salary, according to the PF Act, you cannot reduce the PF wages (contribution) by dividing it, as this would reduce the liability. It should be okay for new entrants.

2. Your structure is fine, but please make it as follows: Basic + DA = 60%, and the rest should be divided into other allowances. Note that Special Allowance is also considered as DA and is chargeable under PF, so avoid using this component name. You may include Conveyance, Wash Allowance, Attire Allowance, Performance Allowance, Attendance Allowance, etc.

I hope this helps clarify the situation. Let me know if you need further assistance.

Best regards.

Dear All,

I recently joined a private limited company in Andhra Pradesh. They don't have a salary structure, so I created one as below:

- Basic: 40% of gross
- HRA: 20% of gross
- Transport Allowance: 10% of gross
- Education Allowance: 10% of gross
- Special Allowance: 20% of gross

My question is, is the above structure correct? If not, as of now, they are deducting PF 12% on gross. Next month onwards, I have to change PF deduction based on the basic salary. Will there be any queries raised by the PF office regarding why the contribution increased or not?

Regards, SPKR

Dear [Email Removed For Privacy Reasons],

In your question, you have not mentioned the nature of the industry, the number of employees (skilled, supervisors, non-tech/tech managers, secretarial staff, and their structure and hierarchy), and the existing pay and allowance structure. Without this data, your question cannot be answered.

Dear All,

There is a huge confusion regarding salary and PF deductions, especially in the context of the recent amendment of the PF wage ceiling from ₹6,500 to ₹15,000. Even the PF authority is also confused when providing advice. If we carefully read the act, we may find two guidelines - one defining Basic wage (sec 2(b)) and another on contribution (sec-6). As per the definition of Basic, it includes all emoluments except DA, HRA, OT, BONUS, COMMISSION, OR ANY OTHER SIMILAR ALLOWANCE. And as per the contribution, it should be based on Basic and DA. Therefore, in any pay structure, the PF authority may need to add back other allowances, excluding exemptions mentioned in the act, to the Basic.

Furthermore, there is another act called the Minimum Wages Act which mandates paying a minimum basic and DA that should not be separated to reduce PF contributions.

Considering all the above, it is advisable to develop a pay structure considering Basic and HRA, with the basic wage not falling below the minimum wages of that category. If the PF gross (Basic and DA/other allowances as the case may be) is below ₹15,000 per month, it is recommended to structure pay as mentioned above. Beyond that, it is possible to create additional ITAX rebate-related components such as conveyance, domiciliary medical, etc.

Thanks and regards,

S K Bandyopadhyay

USD HR Solutions

[Email Removed For Privacy Reasons]

Since a lot of discussion is active in this forum related to PF, I thought I would share my query in this thread.

Doubts Regarding PF Contribution

I have a few doubts regarding PF contribution. Till September 2014, we calculated PF based on a basic salary of 6500. The cutoff was 780 from the employee and 885 from the employer.

I understand, based on the new notification, the calculation should be done according to the basic salary of each employee. My doubt is regarding employer contribution. The employer contribution was 13.61%, but now our accountant is saying that the employer contribution is 13.51%. I rechecked it with the accountant, and he confirmed that the contribution, inclusive of all expenses from the employer's side, is 13.51%.

Can you clarify this matter?

Your salary structure bifurcation is okay. However, it is important to ensure that the basic salary should not be less than the rates of minimum wages as specified in the act. The other allowances do not fall under the definition of wages and therefore do not attract any deductions such as PF, ESIC, bonus, and gratuity. For all these, only the basic and DA will be considered.

Now, you can calculate and fix the structure.

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

PF contribution can't be reduced by manipulating the structure. However, since you have recently joined, if the contributions are not yet remitted to EPF, it may be possible with the consent of your employer but from the very first contribution.

EPF Wage Components

For EPF wage, it includes basic + DA + food coupon + retention allowance as per the latest circular from EPFO. But why go through all these hassles? EPF contribution is a very good tax-saving instrument and in any case, you will need some tax-saving instrument, is it not?

Regards,

The new amendment of PF only changes the wage ceiling; all other calculations remain the same without any change. I do not understand how you are deducting the employees' share in the amount of Rs. 780. A very simple calculation: Rs. 6,500 x 12 = 780, which will directly go to the employee's contribution in the PF account.

Now, let's consider the employer's contribution: 6,500 x 12 = 780. Out of this, an amount of Rs. 541 will go to EPS, and the remaining 239 will again go to the employee's PF account as the employer's contribution. I do not understand on what basis your accountant is stating 13.51%. The employer's share is also 12% only. Other charges such as administrative charges, EDLI, etc., shall be borne by the employer.

The salary ceiling limit for employees' pension will be Rs. 15,000 per month. Previously, it was Rs. 6,750. This means 8.33% of Rs. 15,000 basic, i.e., Rs. 1,250 per month, will be diverted to the pension fund. Previously, it was Rs. 541 only on Rs. 6,500 at 8.33%. These changes are effective from 1st September 2014.

I think I have cleared your doubt. If you are satisfied with this, confirm your views; otherwise, if you still have doubts, you can seek clarifications on the matter. I have addressed similar queries several times on this site by providing exemplary cases.

Regards,
Adoni Suguresh

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

Dear Ramya, there was a typographical error in my advice. I am correcting it. Your deduction of Rs. 780 from the employees is correct.

In the second paragraph, you read Rs. 6500 instead of 67500/-, which is a typographical error. I regret the mistake.

Regards, Adoni Suguresh Labour Laws Consultant

Thank you for the reply, Mr. Adoni Suguresh. You have cleared most of my doubts related to PF. As you mentioned, the admin charges and EDLI will be borne by the company, but inclusive of all these charges, the employer's expense on this matter is 13.61%, right? However, our accountant is saying that it is 13.51% only.

Employer Contribution Breakdown

- EPS: 8.33%
- EPF: 3.67% on 15000
- EDLI charges: 0.5%
- EPF Admin charges: 1.1%
- EDLI Admin charges: 0.01%

Dear All, I recently joined a private limited company in Andhra Pradesh. They don't have a salary structure, so I created one as below:
- Basic: 40% of gross
- HRA: 20% of gross
- Transport allowance: 10% of gross
- Education allowance: 10% of gross
- Special allowance: 20% of gross

My question is, is the above structure correct? If not, should I make any changes? As of now, they are deducting PF at 12% of the gross salary. Starting next month, I will have to change the PF deduction to be based on the basic salary. Will there be any queries from the PF office regarding why the contribution increased or not?

In view of the hike in the ceiling of wages to Rs. 15,000/- and all the components of salary that are ordinarily, necessarily, and uniformly paid to the employees are being treated as basic wage for the purpose of PF, it is better to have only 2 components, i.e., BASIC and HRA only if the Gross Salary is less than Rs. 15,000/-. If it is more than Rs. 15,000/-, structure it in such a way that you have either Basic & HRA only or Basic (Rs. 15,000) plus HRA and other components.

Regards,
KMR, Bangalore

I am happy to see that your doubts are cleared. Now, regarding the confusion about your employer's contribution, your calculation is correct as mentioned by you, 13.61%. If your accountant says it is 13.51%, show the details of the head of accounts. Even then, if he is not satisfied, let him deposit/remit as per 13.51%. It does not matter. Whatever the remittance to EPFO shall be subject to audit of your establishment by your jurisdiction P.F. Office.

At the end of the year, you are required to submit the details in Form 3A, Form 6A, Form 12A, and details of bank remittance with DD or online details for their scrutiny. If any discrepancy is noticed, they will issue the demand notice in case of short remittance or shall be adjusted in case of excess payment. Once the account is finalized and audited, you will get Form 23, i.e., a statement of account of your employees. The only thing to take care of is to deposit the contribution within the stipulated time to avoid the penal clause. I hope now you are clear.

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

Understanding PF Contributions: Gross vs. Basic

Mr. Ramesh, you can't decrease your payment once it has been raised. I don't understand why you want to pay it based on the basic salary when you are currently paying it on the gross salary. There is a rule that mandates payment on the gross salary, and it's important to understand that those who don't comply will face penalties in the future. If any of your employees complain about being paid less or on the basic salary instead of the gross, the PF officials will impose a penalty. It's crucial to continue paying based on the gross salary, as most organizations are not aware of this requirement.

Regards

PF Contribution and Salary Structure Guidelines

In view of the judgment of the High Courts, the PF Department has issued a circular dated 21.06.2011. According to the circular and judgments, all allowances except HRA are to be included in the basic wages if they are uniformly, necessarily, and ordinarily paid to all employees.

In light of this, it is advisable to have only two components: Basic + DA and HRA, if the gross salary is less than Rs. 15,000/-. If the gross salary exceeds Rs. 15,000/-, please ensure that Basic + HRA is Rs. 15,000/- or more, or try to keep only two components. Otherwise, you will have to pay PF contributions on all components except HRA.

Regards,
K M RAMACHANDRA.