Understanding PF Deductions: Which Allowances Count After the Supreme Court Ruling?

In our company, allowances include basic, DA, HRA, conveyance, medical, child, and special allowances. Could you please guide me on which allowances are considered for PF deduction?

Dear Friend,

Except for HRA, all other allowances are considered as part of the Basic pay.

Please let me know if you need further clarification or information.

Thank you.

Thank you, sir, for your prompt reply.
Can we exclude an employee from EPF if the basic salary and other allowances exceed 15,000?

I hope this revision helps!

Please see the example below:

Basic: 11125
DA: 3894
Conv: 890
Special Allow: 1720
Gross: 17629

Can you please confirm if PF is applicable in the above case?

If all allowances exceed 15,000, should PF be deducted or not?

If this is the salary on his joining, then he can be excluded. On the other hand, if he has been a member of PF (existing member), you should continue contributing at least Rs 15,000. This applies to a new joiner whose salary at the time of joining your establishment is more than Rs 15,000 but was a PF member with his previous company and has not withdrawn that PF upon leaving that company.

Appointment Letter Salary Components

In the appointment letter, we are mentioning only the basic salary and basket. Here, the basket means allowances in which employees are claiming as per the convenience of income tax rules, like HRA, conveyance, etc.

In this scenario, although we are paying different components (HRA, conveyance) in the salary slip, the same are not mentioned in the appointment letter as we stated above.

Please let us know for the existing employees, can we increase HRA (here basic will remain the same) and merge all other allowances in HRA subject to a maximum of 50% or 40% to overcome the liability of PF.

Regards, R K Dixit

My advice is NO because even HRA, as a component of salary, which is also part of the gross salary earned by an employee while on duty or on leave, should be part of the PF qualifying salary. What we have to note is that it is the salary, including HRA, that is considered for deducing salary if one has taken a few days leave without pay. Or it is the same gross salary, including HRA, that is paid if he is on leave with pay. That means if he is paid HRA outside the salary, based on the category of the city of residence and employee grade, like what is being given to officers of public sector banks, then only it can be excluded from the PF qualifying salary.

Is there a limit on HRA as a % of Basic? Typically, companies have 60% of Basic to 100% of Basic. Can HRA be more than 100% of Basic?

Ravi,

For income tax purposes - yes, the 40% or 50% rule will apply. But, if HRA is, say, 100% of Basic, would it be excluded from PF computation.

Understanding HRA and Salary Components

There is no such rule that you can keep the HRA at 40% or 50% of the Basic. Even under Income Tax, we have different situations for exemption, and it is not a flat 40% or 50% of the basic wage.

How Does It Work for Employees Residing in Their Own House?

In the case of employees who reside in their own house, how does it work? All that you have to note is the salary is the amount agreed upon by the employee to do a certain work, and it is that salary which is taken into consideration when he is absent without pay. It is also the salary that is paid if he is on leave with pay.

Gross Salary and PF Qualification

As such, the gross salary is the salary that should qualify for PF, subject to the ceiling which, at the present rate, is Rs 15,000. After all, it is a matter of Rs 1,800, and I don't understand why the employers are again bifurcating this amount and showing a very small amount as basic wages and a huge amount as HRA. Is it that people work just to pay rent?

Understanding HRA and Its Implications

HRA is paid only to employees who work for us in a specific location but have their own house elsewhere. When hiring, there is an understanding that employees must stay in the location where they work. To facilitate this, we offer, in addition to salary, an amount for leasing a house, known as HRA. Depending on the employee category, different HRA slabs can be applied. For workers, it might be a dormitory arrangement with a common bathroom, with rent paid by the employer. For middle-level employees, it could be flats, or furnished villas for others. The rent cost can be added to the CTC but not to the gross salary. Obviously, this is not available for local employees or those from the same locality, which is not an issue. We pay HRA to ensure employees are available at the place of operation.

In the above arrangement, if an employee cannot come to the office for, say, four days due to some reasons and has no leave to their credit, those days are marked as Leave Without Pay. They will receive the full HRA, but four days' salary based on gross salary will be deducted. In the case of HRA as a component of gross salary, they will not receive it. The first scenario acknowledges that they are still in the locality even if they couldn't come to the office. They must pay rent to the landlord in full, regardless of office attendance. When HRA is part of the gross salary, it is lost for the days absent. The reason is non-attendance, and as per employment terms, HRA is part of gross wages and will be proportionally deducted when absent.

HRA and PF Considerations

When HRA is paid over and above the salary, it can be exempted from PF. However, when included in the gross salary, it should be considered part of the PF qualifying salary.

Dear all,

I have a query related to the new PF ruling by the Supreme Court. In our company, we have allowances such as basic+DA, HRA, conveyance, and medical allowance. However, only 50% of employees receive all of the above components, while the remaining 50% of employees receive only Basic+DA and HRA.

According to the Supreme Court rule, special allowances should be included in the PF calculation. My query is, in the above case, should the new ruling be followed considering that all components are not universally paid to all employees?

Please guide me on this matter.

Regards,
Priya

Understanding Special Allowance and PF Qualifying Wages

The Supreme Court has never stated that Special Allowance should be part of PF qualifying wages. Instead, the court has clarified that special allowance paid to all employees should be considered part of wages. If any allowance is paid to a particular category of employees based on the risk involved or special skills required for the work, it can be excluded from wages. Examples include cash handling allowance for those who handle cash and night bata for people who work night shifts. Since these are not paid to all employees, they can be excluded from PF qualifying wages.

If your Basic + DA component is reasonably good, there should not be any problem. The issue arises only when the PF qualifying salary is very low, and you don't even consider dearness allowance in the salary. Obviously, a salary much lower than the statutory minimum will be scrutinized by the EPF Authorities, even though they cannot direct employers to pay as per minimum wages.

Moreover, if the PF qualifying salary is more than Rs 15,000, nothing stated in the Court ruling will apply.

Dear HR fraternity,

Due to amendments/judgments on wage components, we wish to restructure the wage structure to benefit from PF & ESI exemption, which are as follows:

Wage/Salary Components

- Basic
- HRA
- Washing Allowance (Max-1000)

We propose to restructure the total gross salary into the above three components by fixing 61%, 35%, and 4% respectively. Also, we seek clarification/best advice on other allowances such as Attendance Bonus, Night Shift Allowance, Overtime wages, etc., in view of PF judgment/ESI amendment.

Regards, Krishna Kumar

Good Morning Madhu garu, your comments are perfect! If the salary is more than 21,000, automatically the employees are exempted under the ESI Act, and they will manage their medical issues. OK.

Changes in PF & ESI Matters

In view of changes in PF & ESI matters, for employees/workers with applicable wages ranging from 15,000 to 21,000, which wage structure is the best one? Currently, we have more than five wage components, and we wish to rationalize and restrict them to three components as mentioned in my previous query. The components such as HRA and Washing Allowances are already existing in our current wage structure. Also, a sudden increase in salary/wage is not in the hands of the HR Department.

Even if we implement the proposed salary structure, the take-home salary of the employee/worker will also be reduced to that extent. It is a major concern for the industry in the case of low-salaried employees/contract workers, whose salaries are being protected in terms of the Minimum Wages Act.

Calculation of Gratuity and Leave Encashment

Further, we wish to know how to calculate Gratuity and Leave Encashment of an employee. Is it only on Basic Wage or PF Gross (Basic + Children Edn. + Washing Allow.) as directed by the Supreme Court?

In view of the above, your expert advice is helpful to the HR community to avoid any show-cause notices from the respective departments.

Regards, Krishna Kumar

I have already given many comments on the applicable wages for PF, Gratuity, leave encashment, Bonus, etc. To summarize in a single sentence, the wage considered for deducting the salary of an employee if they have taken LOP is the wage used for deciding PF, Gratuity, or retrenchment allowance or anything else. For example, if your salary is Rs 15,000, of which you have fixed Rs 6,000 as Basic salary and have been deducting PF on this amount only, you similarly use this amount for computing Bonus, leave encashment, and obviously, gratuity. However, if the employee takes leave without pay, you will deduct Rs 500 from their salary, which is one 30th of 15,000. If their salary is Rs 6,000 and all other components are just allowances, why can't you deduct only Rs 200, being one 30th of Rs 6,000?

Basic Salary Definition

Basic Salary means the salary as per the contract of employment. Anything paid in addition to this is an allowance, and only such allowances can be excluded from PF, Gratuity, etc. Obviously, for PF, the employer even has the privilege of restricting it to Rs 15,000. Even HRA is part of the salary if paid to all employees without considering whether they live in a rented house or not. A washing allowance paid to employees to whom you have not provided a uniform is also part of the salary even for calculating ESI.

Restructuring Salary and Employee Impact

Restructuring the salary, keeping the cost-to-company unchanged based on changes in the law, is unfair. If permitted, then poor employees will become victims even when there is a hike in salary by means of a notification from the government. The employer will not hesitate to add the electricity charges of a ceiling fan put for an employee or the tea and snacks the employer provides for the employee to make it equal to the statutory salary. Therefore, I will never give advice on how you can restructure your salary to protect your employer. I will only advise that PF is an investment and whatever deduction the employee may have in their take-home salary is only temporary. Being an HR person, convince the employees that a higher contribution would result in higher PF and a higher pension.