Is It Legal for IT Employers to Limit Basic Salary to Rs. 15,000 for High CTC Employees?

Clarification Needed for IT Industry Employees

Please clarify the following for employees from the IT (Information Technology/Software) industry:

- Can an employer limit the basic salary to just Rs. 15,000 even for an employee with a CTC of 12L by paying the rest under the 'Special Allowance' category so that the burden on gratuity for the employer is reduced? Is this not illegal?

- Is there a provision for an employee drawing a CTC of Rs. 12L to contribute more than 12% of the basic of Rs. 15,000 (Rs. 1,800) as an employee contribution for PF? In such a case, is the employer obligated to match the employee's contribution?

Thank you.

Can an employer limit the basic salary?

Can an employer limit the basic to just Rs. 15,000 even for an employee with a CTC of 12L by paying the rest under the 'Special Allowance' category so that the burden on gratuity for the employer is reduced? Is this not illegal?

Response: Yes, as long as the employer is paying above the minimum wages, they can limit the basic pay to Rs. 15,000 even if the total compensation is 12 LPA. Though this is a very primitive approach and is neither fit nor competitive.

Provision for higher PF contribution

Is there a provision for an employee drawing a CTC of Rs. 12L to pay more than 12% of the basic of Rs. 15,000 (Rs. 1,800) as an employee contribution for PF? In such a case, is the employer obligated to match the employee's contribution?

Response: Yes, the employee can pay over and above the 12% of 15,000 as Voluntary PF. However, this does not obligate the employer to match the employee's contribution.

Regards, Rahul

Dear Rahul, thanks for your useful reply. I appreciate it.

Continuing with this, do you mean to say that for the computation of gratuity, only this Basic of Rs. 15,000 is taken into consideration (of course, there is no DA component in the salary)? The reason I am asking this follow-up question is that I remember reading somewhere that in such circumstances, the Special Allowance, which cannot be justified as a one-time payment like a bonus/performance incentive, also has to be added with Basic for computing the gratuity.

Please comment. Thanks in advance.

For computation of Gratuity, only Basic and DA are taken into account irrespective of what other allowances are paid to an employee.

Regards,
Rahul

Definitions of Salary and Wages Under EPF and Gratuity Acts

The definitions of salary or wages under the EPF Act and the Gratuity Act are two different things. Do not extend the same components to each other. You should follow the definitions given in these Acts, which are as follows:

The Employees' Provident Funds and Miscellaneous Provisions Act, 1952

"2. Definitions. - In this Act, unless the context otherwise requires,-
(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."

The Gratuity Act - Payment of Gratuity Act, 1972

Section 2 -
(s) "Wages" means all emoluments which are earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment and which are paid or are payable to him in cash and includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages, and any other allowances.

Please note these definitions are not interchangeable.