Is PF Deduction on Incentive Earnings Required? Seeking Insights from HR Peers

PF Deduction on Incentive Earnings

Our manufacturing company, with about 350 employees, pays all employees a Basic Salary that is close to and always exceeds the Minimum Wages prescribed for our industry. We have no separate D.A. or H.R.A. In addition to the basic salary, we pay an incentive governed by a published incentive scheme, where payment is based on the production of the individual worker.

We have been deducting and remitting P.F. only on the Basic Salary and not on the incentive earnings. Now, we have received a notice from the P.F. inspector stating that we should have deducted and remitted P.F. on the entire salary paid, including the incentive amount.

I would appreciate comments and experiences on this issue from our learned friends in this group. Are we right in what we are doing, or is the inspector correct?

Regards, RAGHAV RAO
Hyderabad, Telangana.

Section 2B of the PF Act states that PF is applicable on Production Incentive in the absence of any specific exclusion.

PF should be deducted only on the basic salary and not on the incentive, HRA, or DA as per the rules of the PF department.

Dear Mr. Shivianjay,

Kindly refer to section 2b of the EPF Act. It is applicable to production incentives. I hope the matter will be clear to you after reading it.

Thanks and regards,
Vicky Pathak

Dear Mr. Pathak,

My attention has been drawn to the Bridge & Roof, Calcutta, case (cited in 1963 AIR 1474 and 1963 SCR (3) 978) where the Supreme Court held that production bonus is covered by the unqualified word "bonus" mentioned as an exclusion in Sec. 2(b)(ii) of the Act, and therefore, PF is not deductible on production incentive and production bonus.

Do you disagree with this stand?

Raghav Rao

The salary you are paying is a solid amount, which is above the minimum wage. However, it should not merely be above the minimum wage. The concept is at least a living wage, so try to provide your employees with a salary consisting of basic pay and V.D.A. (Variable Dearness Allowance raised periodically every six months by the concerned state governments).

Incentives and P.F. Department

Now, moving on to incentives, adding to the salary is not compulsory and is not related to the P.F. department or its notices. Incentives are not regular pay; they vary monthly based on the worker's performance. Therefore, it is not the concern of the P.F. department. Incentive amounts are not permanent payments of employees like H.R.A.

Protesting P.F. Department Actions

So, the P.F. department's actions seem overenthusiastic. You can protest this by replying that you will approach the higher authorities of the P.F. department, stating that you are against adding incentives to the salary as demanded by your workers. Go ahead.

Usually, notices are issued by clerks of the department without the knowledge of the inspecting staff. So, proceed without any problem.

Regards

Understanding EPFO Circulars on Salary Components

The subject is not straightforward. There are several guidelines through official circulars of EPFO on how to deal with the subject. I am referring to three circulars:

1. Circular (1) 7(1) 2012/RCs Review Meeting/345 dated 30.11.2012, point no (12).
2. The subsequent circular (2) ref. no 7(1) 2012/RCs Review Meeting/21224 dated 18.12.2012 instructing to keep in abeyance the 1st circular.
3. Circular ref (3) C-III / 110001 / 4/ 3 (72) 14 / Circular / Hqrs./6693 dated 06.08.2014 - some indirect guidelines to deal with the situation.

All the above circulars are available in the archive of EPFO. I have no idea whether any further circular has been published or not. If we read all three above circulars of EPFO, it will at least guide us on how to deal with the subject.

Thanks & regards,

S K Bandyopadhyay

USD HR Solutions

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