How Do Unpaid Leaves Impact Basic and Gross Salary? Seeking Clarity on PF and ESI Compliance

I need help with understanding if unpaid leaves affect the basic salary of an employee or the Gross Salary (Basic + HRA, in our case) of an employee and thus how PF and ESI compliance are affected.

Example Scenario

For example, a person is hired on a 15,000 Basic and 750 HRA (5% of basic), and they take unpaid leave of 5 days in a month. So, will their basic change for that month to Rs. 12,460, or will the basic remain the same, and will their net change as the unpaid leave is deducted from their net?

Attaching calculations in 2 scenarios. Please guide.

Approaches to PF Calculation

There are two approaches that some take for PF calculation. In the first approach, the actual wages (gross wage) after deduction of LOP are considered as the base. If the amount is still above Rs 15,000, then Rs 15,000 is taken for PF calculation.

The Second Approach

The second approach involves deducting any LOP from Rs 15,000 to determine the PF amount, treating the salary as Rs 15,000 in case of LOP. The second approach is considered correct because if an employee takes LOP, they should lose the PF contribution for those days. In contrast, the first approach results in the same PF contribution for an employee with LOP as for one without LOP, as the gross salary is higher in the former case. Proportionately deducting the PF from the PF qualifying salary of Rs 15,000 makes the calculation equitable and logical.

EPF Contribution Considerations

For EPF, if the employer restricts the contribution to Rs 15,000, then the salary considered for calculation is also Rs 15,000. In case of LOP, the non-contributory days should be reflected accordingly.

Scenario A: Impact on PF and ESI

Scenario A is correct when the basic salary has reduced to a level below the threshold (Rs. 15,000 PM). PF deduction has to be based on the actual salary. The same applies to ESI as well. As for PT, it would depend on the slab corresponding to the salary drawn.

Dear Friend, To ensure accurate calculations, it is important to understand the wage computation process. By doing so, we can prevent confusion from arising.

The process involves the following steps

1. Begin with a fixed wage
2. Calculate the earned wage for the month based on the employee's attendance
3. Arrive at Gross wage
4. Deduct the proportionate amount from the earned wage for statutory contributions
5. Get Net wage

Example computation based on the figures you provided

I. Fixed wage:
(a) Per Month:
(i) Basic: 15000
(ii) HRA: 750

(b) Per Day [(a) / 30]:
(i) Basic: 500
(ii) HRA: 25

II. Earned Wages for the month in question:
(i) Basic: 25 [Present days] * 500 [Per day wage] = 12500
(ii) HRA: 25 [Present days] * 25 [Per day wage] = 625

III. Gross Wage: 13125

IV. Statutory deductions [Employee Contributions]: 1798.43
(a) EPF [12.00% on Basic Wage]: 1500 [If Basic goes beyond 15K, you can put a cap of 1800 or go for actual]
(b) ESI [0.75%]: 98.43
(c) PT[>10000]: If Feb 300, for others 200

V. Net Wage [III - IV]: 11326.56

Hope above will help you...