Understanding EPS Eligibility: Does the 15k Limit Apply to Basic Salary or Gross Pay?

Dear professionals,

We are aware that as per the EPF amendment in 2014, employees with first-time employment and a salary exceeding 15k are not eligible for EPS. However, as per EPF regulations, salary includes basic + other allowances; therefore, does this 15k limit refer to the basic salary or the gross pay?

For example, an employee with first-time employment receiving a basic and DA totaling 15k and a gross pay of 30k, would they be eligible for EPS or not? Please guide me on this.

Thank you.

Dear Mr. Madan,

Ceiling limit is based on the "Wage" as defined under the EPF Act.

As per the said Act, in simple terms (if you want to understand as a layman), wage means:

= Gross - (HRA + Variable allowances if any).

Understanding Basic Wages Under EPF and MP Act

As per the EPF and MP Act, basic wages mean the total salary or gross salary. Of this, HRA (house rent allowance) paid to those employees who are required to stay in rented houses is excluded. However, many employers treat it as a blanket exemption and consider gross wages less HRA as the PF qualifying salary. Therefore, if your gross salary without the element of HRA is more than Rs 15,000 and the employee joining does not have a PF account with their previous employment, then they can be excluded from PF coverage in your organization.

@ Madhu T K,

I really appreciate your deep knowledge of employment law. I have been a fan of your posts for more than a decade. My sincere thanks for your time and efforts.

Understanding the Definition of Basic Wage

As per my understanding of Sec 2 [b] of the EPF Act, House Rent Allowance has been specifically excluded from the definition of Basic Wage. The said provision has been reproduced below:

"Basic wages" means all emoluments earned by an employee while on duty, or on leave, or on holidays with wages, 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, 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.

Clarification from the Supreme Court

Furthermore, in the case of "Regional Provident Fund Commissioner (II), West Bengal v. Vivekananda Vidyamandir & Others [Civil Appeal No 6221 of 2011]", the Hon'ble Supreme Court has clarified which allowances should be considered as Basic Wage.

Considering the definition along with the ruling from the apex court, it appears to me that the HRA is not a part of Basic Wage.

If I am wrong, I would appreciate it if you could let me know the exact provision (or the judgment) in which it has been mentioned that "HRA is basic wage under the EPF Act." It would help me to correct myself.

Looking forward to your reply.

True, Srinivas, HRA is excluded from the PF qualifying wages. In Vivekananda Vidya Mandir's case, HRA exclusion has also been considered. However, when employers, who view employee welfare schemes as a burden rather than benefits, start including large amounts of HRA in the salary structure to reduce their burden, the meaning of HRA may need to be reviewed.

What is HRA?

HRA is nothing but an allowance paid to those who reside in rented houses. Then, who should get it? Only those who reside in rented houses should receive it. How much should the amount of HRA be? It should vary from person to person, depending on the category or salary and the city of posting.

In private organizations, what we see is HRA given as a component of salary without any reference to whether employees reside in a rented house or not. It does not have any direct bearing on the rent they actually pay and may even be higher than what they actually pay. As such, HRA becomes an allowance 'universally' paid to all employees. We know that the Apex Court ruled in Bridges and Roofs (India) Ltd Vs Union of India (1963 (2) LLJ 490) that an allowance paid to all employees universally will be part of basic wages. HRA paid to some employees who reside in rented houses for the convenience of commuting to the office shall be excluded, but when it is paid to all employees, it takes the form of an allowance universally paid to all employees and will then attract PF contribution. Not only PF, but the gratuity payable at the time of discharge should also be calculated considering this amount. This is my opinion, and I have done a lot of research on it for a case on gratuity, the result of which will be available in due course.

The Objective of the EPF Act

The objective of the EPF Act when defining the word "basic wages" was very genuine, and at that time, they should not have thought that employers and Personnel Managers (like us!) who advise the employers would be so meticulous in finding gaps in the wording of the law to escape statutory liabilities. The legislators would have thought that HRA is paid only to those who are eligible to receive it. In private companies where both husband and wife work, both are paid HRA, but they will be residing in the same house. As per the Income Tax Act, HRA is allowed as a deduction only for one person. You can get HRA exemption if you are staying with your parents to whom you pay rent, but you will not get an exemption if you pay it to your spouse!