Why Is HRA Exempt from PF Calculations? Seeking Clarity on This HR Query

Dear Seniors,

For my general understanding, please let me know the facts of why HRA is exempted from PF calculations...

The definition of basic wages under Sec. 2(b) of the P.F Act, on which the contribution is to be calculated, excludes HRA. Therefore, HRA shall not be included in wages for computing contribution.

B. Saikumar
HR & Labour Law Advisor
Navi Mumbai

Mr. Saikumar,

I know HRA is exempted from PF as per the Act. I would like to know the specific reason why it is exempted.

Dear Saravanan, the answer given by Mr. Saikumar to your original query is brief, absolute, and correct based on the provisions of the applicable law, particularly in force on the subject matter of Provident Funds for industrial employees. Your further response raises a philosophical query regarding the exemption of certain allowances from the periodical earnings of wage/salary earning classes for the purpose of conferring benefits to them apart from taxation purposes. It is indeed a difficult question to answer precisely and universally acceptable. Let me try my best to provide an appropriate response:

Understanding Wage/Salary and Allowances

Wage/salary, with grammatical variations notwithstanding its periodicity of payment, is an economic reward paid in consideration of the services/job done by an employed person as per the contract of employment. This economic reward quantifies the contribution made by the employee to the establishment's overall activity to ensure retention. Employment cannot be isolated from the economy's activities. General economic factors have a cascading effect on employment, resulting in the reassessment of real wages earned by employees over time. This led to the concept of allowances as an integral part of the wage/salary structure based on job evaluation rather than individual contribution, thus creating distinctions between basic wage/salary and allowances.

Role of Allowances in Wage/Salary Structure

Throughout the predetermined wage/salary structure period, the basic wage/salary remains fixed while allowances vary based on factors like the cost of living and annual increments, making the total payouts a cost to the employer or CTC determined annually, contributing to the Gross Remuneration for individual employees. Employers incur expenses in the form of direct and indirect benefits for employees, including fringe benefits like gratuity, pension, employment accident insurance, and provident fund. These indirect expenses logically deserve exemption from wage/salary calculations for benefit computation. Therefore, apart from D.A, all other allowances like HRA are exempted from wage/salary calculations for indirect benefits computation. I hope this clarifies your doubt, at least to some extent.

Kind regards

Dear Sarvanan,

Our learned member Mr. Umakanthan brilliantly explained the economic perspective behind excluding HRA. I do not venture to add anything more to it except making a humble attempt to explain the legal perspective of the issue as under.

Legal Perspective on Basic Wages and HRA

The term 'Basic Wages' under Sec.2(b) of the P.F Act is defined to mean and include all emoluments earned by an employee while on duty, leave, or holiday as per the terms of the contract of employment. It specifically excludes certain allowances like D.A., cash value of food concession, OT allowance, HRA, bonus, commission, and other similar allowances. Initially, basic wages were understood as only basic pay. However, DA was included for the purpose of PF contribution in terms of sec.6. This notion that basic wages mean basic pay also draws support from the definition of "Pay" under Sec.2(f) P.F Scheme 1952, which states it includes basic wages + DA + retaining allowance.

As time passed, the term "basic wages" became a subject of intense interpretations and legal wrangling between employers and the PF authorities, with employers narrowing the definition to basic + DA and the PF expanding it to include all other allowances excluding HRA. The matter reached various High Courts in the country. The honorable Gujarat High Court in the Gujarat Cyprromet Ltd case and other High Courts in some other cases interpreted the word 'emoluments' (as the Act did not define it) in the definition of Basic wages u/sec.2(b) in its plain meaning as including any benefit/compensation received by an employee for his service. By that interpretation, it covers allowances like conveyance allowance, lunch allowance, medical allowances (which are not specifically excluded by the provision), and it would have included HRA also had it not been excluded by the said section. Thus, the courts excluded HRA but did not explain any reason behind the legislative intention to exclude it as the Courts won’t resort to interpretation of the statute when the meaning and context of a legal expression is plain and clear.

That's why I only stated that HRA is excluded from basic wages as the said section itself excluded it, but this is not the end of the issue. However, employers aggrieved by the decisions of the High Court filed appeals before the honorable Supreme Court challenging their orders which are pending before it. So the issue did not reach finality. Let us await the disposal of the appeals.

Possible Assumptions for Excluding HRA

1) When the legislature enacted the PF Act in 1952, its intent might have been to define basic wages to mean only basic pay as other allowances like conveyance allowance or lunch allowance or medical allowance, etc., except HRA or OT at that time (1950s) might not be a normal feature of emoluments. So it specifically excluded DA, HRA, bonus, and the other similar allowances which might have been standard features of salary at that time.

2) Secondly, there might be a wide variation in the quantum of HRA payable to various employees both within the establishment and across the industry. This might result in a wide disparity in the accrual of PF benefits among the same class of employees.

3) It might have been that only the basic pay might have been standardized at that time (1950s) and which was being uniformly paid to all employees as was also the requirement under the Minimum Wages Act 1948. DA too was being paid to all employees even at that time as it was linked to the cost of living and other allowances might not have been both uniform and universal in case of all employees. So a measure of uniformity in PF benefits at least among a particular class of employees might be achieved if it were confined to basic pay + DA.

4) It might be that the intention of the legislature was not to impose any financial hardship on the employer by including other emoluments like HRA or OT as he is also required to match employee contribution + bear administrative and inspection charges + the contribution for EDLI also.

These are probably the grounds to exclude HRA, but let us wait for the Apex Court judgment on basic wages. Trust I could succeed somewhat in giving a sense of the issue.

Regards, B. Saikumar HR & Labour Law Advisor Navi Mumbai