Notice Pay and PF Deductions: Can Anyone Clarify This for Me?

Dear All,

Could anybody please help me out and tell me if PF will be deducted on the notice pay given to an employee upon relieving them?

Regards,
Neelam

Notice pay depends on your pay structure. Normally, notice pay is only based on the basic salary. If one or two months of basic pay is given as notice pay, it will attract PF deductions, but ultimately, it is still your money.

Shiva Kumar H

Dear Mr. Shiva,

We are paying 1 month basic + project allowance to employees being retrenched. Therefore, we'll be paying them:

- Notice pay (1 Month Basic + Project Allowance)
- 15 days per year retrenchment benefit

PF will be deducted on the basic amount. Is that correct?

If you are paying for the notice pay, you will deduct PF on that. If you are not paying notice pay, then you are not paying him anything; hence, no PF can be deducted.

Regards,
Nilendra

Dear Nilendra,

Greetings.

If we are ready to pay notice pay, then whether it is for one month basic salary + DA, or one month gross salary. Please clarify the amount.

Cheers,
Trisha
HR Professional

Dear Trisha,

One month notice pay means one month salary. You will have to see if one month salary in lieu of notice pay has been defined or not in the appointment letter. If it is not defined, then one month salary in all parlance means the total gross salary for the month because salary means Basic + All Allowances.

Regards,
Nilendra

You are absolutely correct. PF has to be recovered only on basic and DA if terms of employment are expressed; otherwise, only on basic. I feel whatever you are doing is correct.

Shiva Kumar H

Dear all,

Here I have one doubt. If PF will be deducted on notice pay, then what are the terms regarding notice pay paid by the employees?

With regards,
R Shanti

Dear Shanti,

Greetings.

If the notice pay is paid by the employee, it cannot be regarded as salary but as an amount returned as an advance; hence, PF cannot be recovered on this amount.

Cheers,
Trisha
HR Professional

Dear All,

I have a few clarifications regarding this matter:

If the employee serves the notice period, then he will receive his normal salary for the month, and hence, PF will be deducted in the normal course of business. If the employee does not serve the notice period:

If he leaves on the 17th and the notice period is for one month, then he will forfeit the salary for that month. That is, his attendance for that month will be treated as zero. For the remaining number of days (13 days) during the full and final settlement, the salary for 13 days will be adjusted. This means that if he is supposed to receive a certain amount from the company in the form of OSF recovery, leave encashment, etc., this amount for 13 days will be adjusted. If he has to pay the company a certain amount in the form of a loan taken or any other dues, then this amount for 13 days will be added to it and will be included in the full and final settlement amount. Hence, PF will not be recovered in this case.

Regards,
Nilendra

Dear Neelam,

The payment made for notice pay with full and final payments shall not attract the P.F. contribution. As per the wage definition of the Employees Provident Fund and Misc. Provision Act of 1952, the wage means basic wages, dearness allowance, and any retaining allowance which is earned during the course of employment. Since notice pay is not being earned and paid as per the terms of employment, it is not considered earned wages as per the act and will not attract P.F. contribution.

For your future reference, it is a well-settled practice that no employer deducts P.F. contribution on payment for the notice period as it is not covered under the wage definition.

Thanks,
Mohd. Arif Khan
9891497178

PF will not be recovered on Notice Pay. If these things are happening in your company, that is incorrect.

Regards,
Rajnish Sapra

Dear
If it is payment made by the Co , since it is a Statutory deduction,PF can be deducted.After all it will be re -paid later. The Employer will have to make his relevant contribution.
with kind regards,
V.Sounder Rajan
Chennai – 600 001.
Off : 044-42620864, 044-65874684
,

Greetings to everybody.

Let's first have a look at this most confusing term .Notice Pay' so as to arrive at right kind of solution to the query raised.

Following points need to be noted in this regard :-

1) The Notice Pay can either be given by Employer to Employee (where employer doesn't want the employee to serve notice period for various reasons) or recovered by Employer from Employee (when employee is not in a position to serve the required notice period).

2) The Notice Pay should be clearly defined in Service Code/Staff Rules of the Company and/or in the Appointment Letter. It should explicitly mention what kind of Pay & Allowances will be covered under ‘Notice Pay'. For traditional pay-scales (or for that matter in Govt. Cos./PSUs, only Basic Pay is reckoned for the purpose of ‘Notice Pay'. However, in the modern era of CTC concept, a company may include many other allowances under Notice Pay even though the CTC break up may contain ‘Basic Pay'. In absence of any such definition, the normal rule is to take into consideration only ‘Basic Pay'.

3) Whatever be the components included in the Notice Pay, the same should be construed

and understood as ‘Notice Pay' only without assigning the features of any of the components included therein. As such, even when a Notice Pay is said to equivalent of ‘Basic Pay', the same should be seen, construed, held and considered for any applications as ‘Notice Pay' only and not viewed as ‘Basic Pay' ( on which PF may be determined).



4) Notice pay is to be recovered on pro-rata basis for shortfall in notice period.

5) Notice Pay, when given by employer to employee it takes a form of Administrative Cost to the Company. On the other hand, when it is recovered from employee, it takes form of punitive measure for default in serving notice period.

6) So, unless the definition clearly includes PF in Notice Pay (rarest of rare case), we need not consider the same either for giving or recovering the amount of Notice Pay.

The query raised that, ‘if PF will be deducted on the Notice Pay being given on relieving an employee' may be resolved accordingly.

With Best Wishes & Regards

Dear Neelam,

If notice pay is paid by the employer to the employee, the PF will be calculated as Basic+DA at 12% for both the Employee and Employer.

In the case where the employee is paying the notice pay to the employer, the PF will not be applicable as it is considered compensation provided by the employee.

Regards,
Rapolu HS

Trisha's right. Notice pay is given with the intention of enabling employees to sustain themselves during the period when their relationship with one employer has ended and that with another is yet to begin. As the employer-employee relationship has ended, notice pay is not liable to PF deduction.

Cheers, Meghana

Dear Member,

Notice period wages must be covered for EPF contribution. Notice pay/wages come under the salary and wages part. In fact, I feel you are aware that the EPF is applicable to Leave Encashment salary/wage.

Regards,
Murugavel B.

Whatever compensation you pay to employees is subject to PF, and PF is payable on the Basic rate only.

Dear Colleagues and Seniors,

Some of us believe that since the notice pay is part of salary/wage, PF/ESI should be included. Others believe that since wages/salary are for work done or during the period of work, and the notice pay does not include workdays (rather taken as after the last working day).

Hence, I am still in confusion about the "exact" implication of the same. Kindly guide in such a case what should happen, whether ESI/PF should be deducted or not from notice pay, with adequate logical/statutory support to it.

Regards

Dear Seniors and Colleagues,

One more point that I would like to address: if we are treating it in the books of accounts as salary, then quite obviously, we have to take into consideration ESI/PF. However, if it is categorized under another head, then there is no need to consider ESI/PF.

Possible Heads for Allocation in Books of Accounts

What could be the heads in the books of accounts where one can allocate this, considering both of my queries herein and above?

Regards