Understanding PF Deductions: Should It Only Be from Basic Salary or All Components?

Hi, as per our current salary structure, basic/HRA/CCA/conveyance/other allowances are the salary components, and PF 12% is deducted only from the basic salary. As per the understanding, PF is to be deducted from basic and DA, whereas we don't have a DA component; it is deducted from only the basic. The basic salary, as per the structure, is approximately 35-40% of total earnings.

Recently, we had an inspection by the PF office, and a query was raised as to why we are deducting PF only from the basic and not from other allowances. In this regard, the following information could help in dealing with the PF office. Request to please provide your inputs:

1) Is there any stipulated method/percentage of total earnings, etc., for basic salary calculation?

2) Is there any rule that PF should be deducted from all salary components and not only from basic and DA?

3) Is there any ruling, etc., to substantiate the claim of PF deduction applicable only from basic and DA, etc.?

Kindly help.

Any payout to an employee that is regular in nature, excluding HRA and medical, is considered eligible for EPF.

My gross salary is $25,000. What is my basic salary, and am I eligible for PF deduction?

Hi,

PF is deducted not only from the basic salary, which includes other components like food, conveyance, and other allowances, except HRA up to a maximum of 15000/- as per the PF rules. PF inspection has been conducted in our company, and the PF authority has instructed us to adhere to the same rule that has been followed thereafter.

Satya Nagaboyana
nsatyahr@gmail.com

Understanding PF Contributions and Salary Components

Please refer to http://esewa.epfoservices.in/faq.php to get a comprehensive idea about the Employees' Provident Fund. The spirit of this scheme must also be applicable to any other PF scheme the company may choose to subscribe to.

The following extract from the webpage may answer the question:

"43. WC.7: What is the amount of wages to be considered for PF contributions?

PF Contribution is payable on all emoluments payable in cash to an employee during the month excluding the following: (i) House Rent Allowance (ii) Overtime Allowance (iii) Bonus (iv) Commission or any other similar allowance; and (v) Any presents made by the employer."

You can avoid a lot of headaches with PF inspection if you keep as many employees as possible above the PF ceiling of Rs 15,000/-. The government's agenda is to turn PF into some kind of social security scheme by somehow including all citizens in its ambit. We can't fight the system for too long. The best option is to include employer contributions in CTC. Also, HR managers tend to help employees get income tax exemptions by showing as much HRA as possible in the salary breakup. That may help the employee but not the employer. Let employees do their tax planning on their own.

Regards

Dear All,

Our salary structure contains the following components:

- Basic: 40% of CTC
- DA: 10% of Basic
- HRA: 40% of Basic
- Medical: 1500 PM
- Conveyance: 1600 PM
- Education Allowance: 200 PM
- Rest in other Allowances

Please clarify on which of the above-stated components the PF would be chargeable.

Regards,
Amit

PF Contribution on Allowances: Current Legal Standpoint

Regarding the payment of the PF contribution on allowances, the Madras High Court has given a judgment stating that except for HRA, all other allowances shall be treated as part of the basic pay and shall be subject to PF deduction. Review petitions have been filed in the Supreme Court. Currently, these cases are pending in the Supreme Court.

Hence, until the Supreme Court decides on the case, we do not need to pay PF on the allowances. If any PF inspection authorities request payment on allowances, you can cite these pending judgments in the Supreme Court.

Regards, T. Mahendar Reddy

As far as the basic pay is a reasonable percentage of the total salary, PF authorities cannot insist because there is no specific mention in the act or in PF circular about the percentage.

T. Mahendar Reddy

Respected All,

I have a query regarding Welfare Officer (as per AP Factories Act). If a revised salary structure copy is available, please send it. It's very urgent.

I have newly joined an organization where we pay employees on a consolidated scale. I want to reconfirm my understanding of the change in the PF ceiling wage of ₹15,000 per month.

For a gross salary of ₹12,000 per month, we have the following structure:
- Basic: ₹7,800
- HRA: ₹1,800
- CLA: ₹1,200
- TA: ₹1,200

Currently, we deduct PF in the amount of ₹936 (₹7,800 * 12%).

To meet the PF ceiling wage requirement, I am suggesting the following structure:
- Basic: ₹12,000 so that PF will be ₹1,440 (12% * ₹12,000).

Please confirm if this is correct. The aforementioned proposal was discussed with my PF consultant.

Regards

Hello, everyone,

Whatever component of wage/salary you choose to keep, the PF deduction cannot be less than the amount of prevailing minimum wages as fixed by the appropriate government. Here is a circular from the PF department:

Jacob Pratap
Deputy Labour Commissioner, Punjab (Retired)
Consultant (Labour Laws)
Qualified External Member of ICC for Sexual Harassment Act, 2013

Thank you.

Is there any minimum limit of basic salary for PF contribution? I mean, suppose an employee is receiving Rs. 1500 as basic salary, is he eligible to have PF deducted?

One employee is receiving a consolidated pay of Rs. 15,250 without any basic and D.A. in an organization. Now, the organization is not deducting and contributing to PF on this wage as the wage exceeds Rs. 15,000. Is this right as per the rules?

Dear Jacop Pratap,

I agree that the circular you attached is older. Here, I am attaching a circular which clearly states that the circular dated 23/05/2011 regarding the splitting of minimum wages for the purpose of PF contribution is not permissible and is KEPT IN ABEYANCE.

The circular attached is dated 02/12/2011, which states that the above circular dated 23/05/2011 is KEPT IN ABEYANCE.

If I am wrong somewhere, please advise.

Nilesh Dhameliya
Manager HR

At the outset, the question of whether the employer can split the minimum wages and whether PF contribution is payable on all allowances excluding HRA is yet to be decided by the Hon'ble Supreme Court. Please refer to the attached note on the above issue. The pending cases on this subject will come up for hearing during this month.

You are liable to deduct PF contribution based on the current wage ceiling of Rs. 15,000/- (either Basic or Basic + DA, as the case may be).

Suppose an employee is getting Rs. 1,500 as basic salary; is he eligible to be deducted for PF? YES.

Regards,
P.S. Lakshmanan
S. G. Management Services
(PAN INDIA Consultant – Labour Law Compliance, PF, ESI, P Tax, Benefit Management & POSH COMPLIANCE) - KOLKATA

Hi Everyone!

We are planning to restructure the salary. If an employee's gross salary crosses 15000, should their basic salary be 15000, or can it be split into other components and have only 15000 deducted for PF?

Please clarify my query.

Regards, Lalitha

Hi Lalitha,

You have to add components as follows:
- Basic is 50% of gross salary.
- HRA is 50% of basic (in metro cities) and 40% of basic (in other states).

These two components are mandatory. You have to structure accordingly and, if required, you can add other allowances to balance the salary.

Regards,
Kavita

Provident Fund (PF)

Employees’ Provident Fund is a small savings scheme offered to Indian workers as well as international workers through the EPFO of India. The scheme allows the accumulation of funds as well as the accrual of interest on the accumulated funds. The funds collected are made up of contributions partly from employees and partly from their employers.

Contributions from employees as well as employers add to the EPF. However, contrary to common belief, the entire portion of the contribution from an employer doesn’t go exclusively towards the Employees' Provident Fund.

Division of Funds

1. 12% of the Basic Salary and standard allowance of the employee goes directly towards the Employees’ Provident Fund.
2. 13% of the Basic Salary and standard allowance of the employer is divided as follows:
- 3.67% of contribution towards Employees’ Provident Fund
- 0.5% of contribution towards EPF Administration Charges
- 0.5% of contribution towards EDLI Administration Charges
- 8.33% of contribution towards Employees’ Pension Scheme

Minimum Salary Limits

Employees with monthly salaries less than or equal to INR 15,000 now have to contribute mandatorily towards EPF. The PF amount is calculated based on the basic amount. PF will be calculated as 12% of the basic salary.

Provident Fund Calculator

Basic Pay: 25,000 /Month

PF Contribution:
- Employee: 12% of 15,000: ₹1,800.00
- Employer: 13% of 15,000: ₹1,950.00

Total: ₹3,750.00