Confused About New PF Calculation Rules? Let's Clarify the Right Way to Calculate!

Hello everyone,

PF Calculation Amendment

As per the new amendment, PF Calculation has changed. Previously, we used to calculate 12% of the employee PF contribution from (Basic + DA), but after the amendment, it needs to be calculated from (Gross - HRA). So, two pay components are now compulsory in this calculation. The first one is BASIC, which is calculated as 40-50% of the Net salary, and the second one is HRA. Now, should we calculate 40% from Basic or Net salary?

Example Calculation

For example: If the salary is 18,000, the basic is 7,200, which is 40% of the salary, and HRA.
1. 40% from the net salary is 7,200.
2. 40% from the basic salary is 2,880.

Which one is correct, so that we can arrive at the PF wage to calculate PF?

Understanding PF Contribution and HRA

Even prior to the amendment, PF was to be contributed on the whole salary excluding any allowance paid for house rent. When you pay HRA uniformly to all the employees without considering whether the employees reside in their own houses or rented houses, then that will become a part of the salary only. HRA is an allowance paid to certain employees who are asked to stay in rented premises for meeting business requirements. In your pay structure, it is a component of salary, and obviously, you deduct the HRA component also when the employee takes leave (without pay). If the situation is that you pay full HRA if the employee is on leave, you can exclude it from PF qualifying wages.

Basic Wages and Allowances

Similarly, there is no ruling that basic wages should be so much of a percentage of net/take-home salary. Basic wages mean the total wages as per agreement, whereas allowances shall be a percentage of basic wage or on actuals like reimbursements.

However, if the salary exceeds Rs 15000, you can restrict the contribution to 12% of Rs 15000.

PF Contribution Amendments and Clarifications

There have been no amendments to the PF Act or rules in the recent past. However, there was a verdict from the Apex Court a few years ago guiding on how to consider PF Gross to deduct PF contributions every month. What Mr. Madhu T. K has explained is absolutely correct. I would just like to add that after the implementation of the new Labor Codes, the PF contribution will be based on wages (@10% of wages). Wages should be properly determined as per the definition of wages (Basic + DA).

S K Bandyopadhyay (WB, Howrah)
CEO-USD HR Solutions
[Phone Number Removed For Privacy-Reasons]
USD HR Solutions – To strive towards excellence with effort and integrity

Thank you for your valuable comments.

House Rent Allowance (HRA)

HRA or House Rent Allowance is an amount paid out to employees by companies for expenses related to rented accommodation. HRA can be up to 50% of Basic for Metro Cities and 40% of Basic for Non-Metro Cities.

Types of Deduction Schemes

Following three types of deduction schemes in general are followed by organizations in optional cases:

Organization 1

- Employer Contribution: 12% of Actual (Gross – HRA)
- Employee Contribution: 12% of Actual (Gross – HRA)

Organization 2

- Employer Contribution: 12% of (Gross – HRA), up to a limit of 15000
- Employee Contribution: 12% of (Gross – HRA), up to a limit of 15000

Organization 3

- Employer Contribution: 12% of (Gross – HRA), up to a limit of 15000
- Employee Contribution: 12% of Actual (Gross – HRA)

So, HRA is the component to be considered important as per the new verdict. Is it valuable to maintain 40% of Basic for HRA, or is there any other way?

Allowance as Part of Basic Wages

An allowance that is paid to all employees should be part of basic wages.

Understanding HRA

HRA for any purpose, including income tax purposes as explained by Sasikumar Venkatesh, is an allowance only when it is paid separately and not along with the salary. However, many have interpreted it as a component of salary fixed by the employer for convenience.

If you receive HRA, you will still get it even if you take a few days' loss of pay leave. If you make a proportionate deduction of HRA, that itself proves that it is part of your salary.

PF Contribution on Gross Salary

Hence, the principle of PF contribution on gross salary less HRA will not stand, although in practice, it is being followed by many employers.

Dear Sashikumar,

Even though Mr. Madhu T K has explained the position of HRA in detail, you feel that PF Gross should be (Monthly Gross - HRA), which many organizations are following. You mentioned that for metro cities, the maximum limit of HRA is 50% of basic and for non-metro, 40% of basic. There is no law in this regard. Only under the ITAX Act for the calculation of rebate under HRA, there are three tests, one of which is the 50% and 40% conditions. You also mentioned that in Organization 3, employee contribution is 12% on actual basic, which is VPF and not necessarily the amount will be 12% on actual basic. It may be 15% or 20% or anything else of the 15,000/- limit as VPF.

Now, regarding what should be the percentage of HRA (though I agree with Madhu T K) - 40% of monthly gross or 40% of Basic. In your post, you mentioned that Basic is 40% of the monthly gross, therefore, in my opinion, HRA should be 40% of Basic; otherwise, both Basic and HRA amounts will be the same and may not be accepted by the EPFO authority.

S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions [Phone Number Removed For Privacy-Reasons] USD HR Solutions – To Strive towards excellence with effort and integrity

Dear Mr. Sasikumar Venkatesh,

You have raised a practical problem, but I believe you are treating some components improperly. For example:

1. **Net Salary ("first one is BASIC, it's calculated as 40-50% from Net Salary"):** Net Salary is a secondary point (phase) of Gross & Basic Wages, which comes after deducting PF, ESI, LWF, PT, etc., from the Gross Wages. However, some deductions may be calculated on Gross and some on Basic Wages. To match the negotiated Net Salary, you can adjust the Basic and other components, but it is not practical to determine Basic based on Net Salary.

2. **HRA:** You have presented two forms of HRA: (i) PF Deduction & (ii) Income Tax Exemption. Both have different approaches. Ideally, the HRA should be 50% of Basic so that all employees can avail maximum Tax Benefits (Metro and Non-Metro). In the end, you mentioned "HRA 40% From Gross," which is also not the right approach. HRA is always calculated based on Basic, not Gross.

Seniors have shared their opinions. So, it is advisable to first understand the different scenarios, consult with management, and then choose the optimized option.

As per my opinion, based on CTC, you can choose from the below options:

1. Though the new Act is still not implemented, if you want to choose, then keep 50% Basic (assuming the rest 50% will be excluded salary), pay 50% HRA of the Basic, and cover the rest in other components (in a way to make it tax-friendly). For example, if CTC is 60,000 (Basic-30,000, HRA-15,000, PF-3,600, Bonus-2,500, Gratuity-1,443, PL-1,250, Special Pay-6,207).

2. In the case of a high salary, you can apply a Reimbursement Policy (which will not count as part of the Wages). For example, if CTC is 100,000 (Basic-40,000, HRA-20,000, PF-4,800, Bonus-3,332, Gratuity-1,924, PL-1,667, Special Pay-8,277) and keep 20K in reimbursement (Fuel-10,000, Mobile-3,000, Tuition Fees-5,000, LTA-2,000).

3. If you want to follow the existing structure, keep the Basic as 40%, include 50% HRA (on Basic), and mention other components. For example, if CTC is 60,000 (Basic-24,000, HRA-12,000, PF-2,880, Bonus-2,000, Gratuity-1,154, PL-1,000, Special Pay-16,966).

Hope the above will also help to clarify your doubts.

Thank you for all your valuable comments.

PF Calculation in Our Organization

Let's be clear in our organization. We usually calculate 12% PF from (Gross - HRA). Here, the basic is 40% of the net salary, and HRA is calculated at 40% of the basic.

For example: If the net salary is 18,000, then 40% of the basic is 7,200, and HRA at 40% of the basic is such that the (Gross - HRA) will be 15,120.

Issue with PF Wage Exceeding PMKY Eligibility

The actual problem arises when the PF wage exceeds 15,000 (PMKY) eligibility in PF, resulting in rejection. How can I overcome this issue?

Possible Solutions

If I calculate HRA from Gross or Net, this problem will be resolved. Are there any other legal ways to overcome this issue?