Is It Right to Deduct Provident Fund from Gross Salary Minus HRA? Let's Discuss!

A company is deducting Provident Fund based on Gross Salary less HRA. Is this way of deducting PF correct? If yes, kindly state the name of the act. As per my knowledge, PF is calculated based on Basic Salary plus DA. Kindly shed some light on this. Thank you.

Greetings! Every employee has to contribute 12% of his/her Basic Salary + Dearness Allowance (DA) towards the Employees’ Provident Fund (EPF). However, DA is available only to government employees. Thus, the EPF contribution of private sector employees is determined only on the basis of the Basic Salary/Pay. Hope it helps 

Regards,
Preet

Preet, how can you say that DA is available only to government employees? Have you not gone through the Minimum Wages Act? Or if the Employees Provident Fund and Miscellaneous Provisions Act, Employees State Insurance Act, Payment of Gratuity Act, Industrial Disputes Act, Payment of Bonus Act, Maternity Benefits Act, Employees Compensation Act, or any Act applicable to establishments not being government services wherein salary/wages are defined, mention is given about dearness allowance, how can you say that DA is not payable to employees in private establishments?

It is true that based on a judgment in AirFreight India vs State of Karnataka, in which the Apex Court has said that so long as the total salary that you pay is more than the sum total of the basic wages and dearness allowances payable as per the Minimum Wages Act, you need not pay DA separately, many private establishments started avoiding DA. The interpretation of PF qualifying salary as basic salary alone is the outcome of this judgment. But the essence of the judgment is not that the employer can fix a low basic salary and pay PF and other statutory and social security or employee beneficial contributions on that basic salary only.

EPF and MP Act

Coming to EPF and MP Act, the definition of basic wages is very clear, and it is the total remuneration as per the contract of employment. Of course, there is an exclusion part in the definition, and that is HRA. However, even when the HRA is paid universally to all employees without reference to their residential status as to whether they reside in a leased house or owned house, then the HRA will become part of wages qualifying PF contribution only. This was very clearly stated in Bridges and Roofs's case. As such, the Gross salary should qualify for PF. But in the case of PF, since there is a threshold limit to the wages, the employer can restrict the contributions to 12% of Rs 15,000. Nowadays, 15,000 is a very low salary and many states have a bare minimum wage more than Rs 15,000. Therefore, the inclusion of allowances does not arise. But per se, you have to take basic salary and all allowances. You can exclude only HRA. That also can be questioned if it is paid to all employees universally. But since HRA is excluded from the scope of wages in the Act, you can exclude it.

Dear Madhu Sir, On what basis should we include HRA for PF contribution? As per my understanding, PF is calculated on Basic + DA + Retaining Allowances. Please correct me if I am wrong. Thank you.

Regards, Nirali

Please read the comment in detail. The HRA is excluded from the scope of wages. However, there can be a situation where HRA will also be considered for PF contribution. That is, if the HRA is part of the salary and is paid to all the employees universally, then it will lose the characteristics of a house rent allowance.

After the Supreme Court's verdict in Surya Roshni etc., which interpreted the definition of basic wages to include all allowances universally paid, employers started bifurcating the salary in such a way that a major part is put in HRA because it is specifically excluded. This may even lead to tracing it from the source whether the HRA is paid to those residing in leased houses or not. The provisions under the Income Tax Act are very clear about this. If you apply it, you will lose it as an exclusion part of the salary.

Moreover, as I mentioned earlier, it is a matter of Rs 15,000, and even if you exclude HRA, it will not make any difference.