Understanding PF Contributions: Is It 12% on Basic Salary or More?

Example:
Basic - 4000 / HRA - 4000 / Other allowance - 4000 / Shift allowance - 2450

Is the PF contribution of 12% calculated on Basic - 4000?
Or is it 12% on all components except HRA?

As per the law, it should be on gross salary except HRA. However, most of the companies, including the big MNCs, pay it only on Basic salary. This is because as per PF law, contribution is payable on basic salary and dearness allowance. At the same time, nobody interprets the meaning of basic wage, and it is the whole salary which the employer has agreed to pay to the employee except HRA and not the one that you fix for your convenience.

Thanks, Madhu. It's clearly mentioned in the act that:

Definition of Basic Wages

(b) "basic wages" means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include:

(i) the cash value of any food concession;

(ii) any dearness allowance, that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living, house-rent allowance, overtime allowance, bonus, commission, or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;

(iii) any presents made by the employer.

But still, many companies are sticking to the basic component only. It's sad that the PF Office is least bothered to take steps to educate the employers.

EPFO Guidelines on PF Contribution

While Sec. 2(b) excludes DA and the cash equivalent of food expenses from Basic Wages, Sec. 6 covers all allowances for PF purposes. This was reiterated by EPFO in their circular dated 30.11.2012. Many employers opposed this, and the then UPA government put this circular on hold. Many Trade Unions raised their voices against the EPFO circular being put on hold. However, EPFO again reviewed this and is of the opinion that all allowances except HRA should be clubbed with basic pay for the calculation of PF contribution. A good labor practice warrants the benefit should go to the labor as PF is a social security measure, and EPFO is correct in this respect. Let us all follow EPFO's guidelines.

PF Deduction on Basic and DA

As per the PF Act, PF is to be deducted on Basic, while DA is not included in Basic. DA is separately added for PF wages. "Basic wages" means all emoluments which are earned by an employee while on duty, on leave, or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include:

(i) the cash value of any food concession;
(ii) any dearness allowance, that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living, house-rent allowance, overtime allowance, bonus, commission, or any other similar allowance payable to the employee in respect of his employment or of work done in such employment.

EPFO has stated in the circular that all the allowances are to be included except HRA. However, the act has not been amended accordingly. On a circular basis, the act is not changed. It is clearly mentioned that "similar allowances are excluded" and only Basic and DA are included for PF wages.

I repeat that for the purpose of contribution, your basic salary and dearness allowance will only be taken into consideration. But what constitutes a basic wage is very important. Any allowance which is paid as per the contract of employment is part of the basic wage. Now the employers will also argue that they do not pay any wages but only salaries, and therefore, they do not pay any PF. It should be understood that it is not just the basic salary as per your salary structure, but the real meaning that should be taken into account. Even the special allowance is part of the PF contributing salary if it is paid to all employees in general.

Dear Sir,

Special allowance is part of PF. Special Allowance is declared by the State Govt. / Central Govt. in their minimum wage schedule. Therefore, establishments should avoid Special Allowance. If any allowance is unanimously and equally paid to all the employees, it may be treated as part of PF wages. The EPF Officers are not compelled to include all allowances in PF wages. Employers can challenge the same.

Thanks, Vidyadhar Bhat

In states like Maharashtra, the dearness allowance is called Special Allowance. It is part of minimum wages. However, what I have pointed out is an allowance that is normally a component of salary but other than DA.

I would like Vidyadhar Bhat to clarify his statement, "The EPF Officers are not compelled to include all allowances in PF wages. Employers can challenge the same." Why and how can an employer challenge, and for what?

I would request the members to refer to the Supreme Court verdict on Bridges and Roofs (India) Ltd Vs Union of India and decide whether we should include special allowance (other than dearness allowance) or not.

Dear Sir, there is no doubt that Special Allowance is applicable to PF wages. Hence, I have advised avoiding the use of this term in the pay structure.

If the member is contributing on wages above 15K, there is no question of paying additional amounts above 15K under any allowance name.

For wages below 15K, the establishment should pay PF on Special Allowance.

If the establishment is paying PF contribution on Basic and DA, and the PF official asks to pay PF on allowances, this can be challenged. The PF Act states, "but does not include - house-rent allowance, overtime allowance, bonus, commission, or any other similar allowance payable to the employee in respect of his employment or work done in such employment."

Thanks,
Vidyadhar Bhat

I agree with Shri Vidyadahar. What EPFO insists is that PF wages should not be less than the minimum wage since some employers attempt to split their wage structure to reduce the basic wage and then add some allowances. EPFO is against such splitting of wages to calculate PF Contribution on a lesser (basic) wage.

In this connection, I would like comments on the EPFO (internal) circular dated 23.05.2011 (attached).

EPFO and Minimum Wage Enforcement

Yes, there was an attempt by the EPFO to ensure that employers pay contributions at least on the notified minimum wages. However, this has not been effective because the EPFO cannot enforce minimum wages, which is a subject of the State Labour Department. There are many industries for which minimum wages have not been notified. In such cases, you can straightforwardly say that you are not in scheduled employment and therefore pay according to the company's rules.

All of this has happened due to the poor enforcement of the law, and employers have misused the term "basic," although the law clearly states that it should include all components. When we noticed that HRA is exempted, we also started paying 90% HRA! This only happens in India!