Understanding EPF Contribution Rules and Basic Salary Guidelines

I work as a SE in a private software company and seek some clarification on the rules for the PF account and the basic salary. Following are the questions on which I seek clarification:

1. Is there any rule stating that the basic salary of the person must be at least 50% of the gross monthly salary?
2. Can the company decrease the basic salary to Rs 15,000 and state that the maximum basic salary must be Rs 15,000 even if the gross monthly salary is Rs 1,00,000?
3. Suppose the gross monthly salary of a person is Rs 1,00,000 (and if the answer to question 1 is yes), then is the PF contribution based on Rs 50,000 (basic salary = 50% of the gross monthly salary) or Rs 15,000?

Any links to the documents issued by the EPF would be very helpful.

Thanks in advance.

Understanding Basic Salary and PF Contributions

There is no rule stating that the basic salary should be 50% of the gross salary. However, with the emergence of the term CTC (Cost To Company) and the diminishing importance of structuring the salary with a basic salary followed by additional components like DA, HRA, and other elements based on percentages or fixed sums of the basic salary to arrive at the gross salary, the practice of initially determining the total salary or CTC and then breaking it down into segments like basic salary, HRA, conveyance allowance, lunch allowance, performance allowance, and more has become a standard procedure among companies, particularly new-generation companies where the Personnel department has been replaced by the HR department without any specific reasons. This practice has resulted in reducing the basic salary, which is considered the statutory salary and serves as the basis for various payments such as PF, Bonus, leave encashments, gratuity, layoff or retrenchment compensation, leading to a decrease in the employer's "other liabilities."

"Aggrieved by this practice," the Employees Provident Fund Organisation made a decision that the basic salary or the salary contributing to PF should be at least 70% of the gross salary, although they were also accepting of a minimum of 60%. Consequently, many companies began dividing the salary with 60% designated as the Basic salary and the remaining as other allowances.

In simpler terms, this practice has evolved into a rule among employers, although it lacks legal sanctity. For employees, a higher basic salary is advantageous as it determines their bonus, compensations, gratuity, etc. For employers, maintaining a lower basic salary helps in cost reduction.

Setting the Basic salary at Rs 15,000 would entitle an employee to PF coverage. It is not mandatory to exclude an employee if the basic salary exceeds Rs 15,000; however, coverage is necessary if the employee was a PF member in a previous company and it remains unsettled. Even in such cases, the employer can limit the contribution to 12% of Rs 15,000. This restriction is due to the wage ceiling under the Provident Fund Schemes being Rs 15,000. Nonetheless, if the employer wishes to contribute based on a higher salary, it is allowed as a social security investment. Neither the employee nor the Provident Fund Organisation can insist on contributions above Rs 15,000 or any other specific amount like Rs 50,000, as mentioned in the example.

Regards,
Madhu.T.K

The answer to your query is a big NO according to me. The limit of Rs 15,000/- is there for the employer's contribution. However, it is not just basic alone but includes DA if paid. If the gross or basic is Rs 30,000/-, the employer can restrict their contribution to 12% of Rs 15,000/- or pay 12% of the full salary.

No, there is no such rule that a particular percentage should be your basic. Also, the employer can limit his liability of PF to 12% of Rs. 15,000/- as specified by the PF department. Please note that the basic can be even more than Rs. 15,000/-

Regards,
Ashutosh Thakre