Is PF Deduction Shifting to Gross Salary Like ESIC? Let's Discuss the Impact!

Dear All,

Nowadays, I am hearing that PF deduction will be based on gross salary soon, similar to ESIC deduction. Please discuss this as there is also a seminar going on the same topic.

Understanding Gross or Consolidated Salary and PF Applicability

Gross or consolidated salary is a concept; however, PF is still applicable on Basic + DA. It is observed that some establishments split the salary into bogus allowances to evade the EPF contribution.

Reasonable Allowances and EPF Eligibility

There is a reasonable concept of HRA, Conveyance, Medical, and Education Allowance. However, these allowances cannot exceed 100% of the basic salary. Naturally, the EPF eligible salary cannot be less than 50% of the gross salary.

The labor department is monitoring such incidents, and soon they will issue guidelines.

Generally, companies split the salary into various components to lower contributions towards employee benefits. As per sec 2(b), EPF will be chargeable on Basic plus DA. Nowhere is it written that salary cannot be bifurcated or that EPF will be payable on minimum wages. However, the Madras High Court has given the judgment that except HRA, all other allowances shall be treated as part of the basic salary for EPF contributions. The review petition has been filed, and this case is pending before the Supreme Court.

Thanks & Regards,

V. SHAKYA
HR & Labour, Corporate Laws Advisor

Dear V. Shakya, U. S. Sharma, there are various decisions/petitions pending on the issue related to the definition of wages for PF deduction. I have one strong query: whether the specified minimum wages can be further split into Basic + HRA + Conv. etc. For example, if the Minimum Wages for the state are Rs. 10,000.00, whether the employer (for PF calculation) can split this into Basic - Rs. 5000 (being 50% of gross), HRA - 2500 (50% of Basic), Conv. 1600, and Special Allowance Rs. 900. If there is any court decision (cleared and final) related to the matter, please share the same.

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Salary Splitting and Legal Compliance

As long as you are paying a salary more than the Minimum Wages by splitting the salary into various components, you are not violating the law. Therefore, many organizations are taking advantage of this by showing lower Basic Pay to reduce the PF and Gratuity liabilities.

Bonus Payment Requirements

As far as the Bonus is concerned, you are required to pay a minimum Bonus of Rs. 7,000/- if the employee has worked for the full year without any deduction in salary. Here, you are not allowed to take advantage of lower Basic pay; i.e., even if an employee is getting a Basic pay of Rs. 4,000/- per month, he will get an annual Bonus of Rs. 7,000/-.

Regards, Suresh

EPF Contribution and Salary Bifurcation

EPF authorities are not empowered to fix the wages for PF chargeability. Therefore, they cannot force the employer to pay PF contributions on minimum wages. Hence, you can split the salary for EPF contribution, but do ensure all the other components should not be more than 50% of the basic salary. However, the Punjab & Haryana High Court and EPF tribunal have also permitted the bifurcation of salary for PF contribution. The Punjab & Haryana High Court judgment and EPF tribunal copy are attached here for your kind reference.

Thanks & Regards,

V. SHAKYA
HR & Labour, Corporate Laws Advisor

EPF is now mandatory for all those whose salary is less than Rs. 15,000. Companies split the salary into various components to pay lower contributions towards employees' benefits, and the employer is also required to make a matching contribution.

Dear Satish ji,

There is no such circular, notification, or gazette notification regarding 50% of basic to gross salary. You need to pay the Basic plus DA component as per the Minimum Wage Act if it defines the minimum wage as Basic plus DA. Additionally, there is no law stating that the salary must be split into various components, except in some states where there is a law on House Rent Allowance (HRA).

Thank you.