High Basic Salary Percentage: How Can We Adjust to Lower PF and Gratuity Costs?

Hi, my company's basic salary percentage is 70%, which results in us having to provide a higher amount of PF and gratuity to our employees. I am interested in exploring if there is a way to rectify this situation now and reduce our basic percentage. Thank you.

Understanding Salary Components and Statutory Contributions

What is your objective? If you have hired employees to work with you, the salary that is offered to them is the basic salary. You cannot contribute the statutory contributions based on a percentage of that salary alone. In the case of PF, the maximum contribution that an employer is bound or liable to pay is Rs 1800, being 12% of Rs 15000. For gratuity, it is not just the basic pay or 70% that should qualify for payment, but the total salary on which the gratuity should be calculated. Some allowances are excluded from the term wages, such as overtime allowance, bonus, commission, house rent allowance, and any other similar allowance.

Understanding Allowances in Salary Structure

Certain companies include "other allowance" as a component of salary. However, please note that there is no specific allowance called "Other Allowance." There may be allowances for special purposes, like education allowance for children's education, heat allowance for employees exposed to heat, or hill allowance for those in hill areas. These allowances are not universally provided but are specific to certain employees. HRA is paid to employees residing in rented houses, as a compensatory allowance. It is not paid if the employee resides in their spouse's house. When both spouses work in the same company, HRA is available to only one person.

Legal Interpretations and Employer Strategies

The law is often interpreted in different ways by auditors and consultants to favor employers, but this may not always work in their favor. Allowances disguised to deny employee benefits will eventually be revealed. Therefore, if 70% does not align with the law, why consider further reductions?

Hi, Thank you for your input. At 70%, we are paying a lot more PF than required, additionally to each worker. Mine is a labor-intensive company, and since EPF is calculated on basic, we have been paying an extremely excessive amount for years. The reason I am asking this is to know if I can reduce the percentage across categories, if not for the entire company. Since we have a cap of 1800 Rs. on EPF, it's not that beneficial to us right now since our average salary is low (labor-intensive). The purpose of this is to know if I can reduce it in a rightful manner, and not at the cost of any employee.

Understanding EPF Calculation

EPF is not calculated on basic pay alone; it is calculated on gross salary excluding house rent allowance (HRA) paid as a compensatory allowance. Even HRA paid universally to all employees, regardless of whether they reside in leased accommodation or if their spouses receive HRA benefits, can attract PF. However, since there is a wage limit of Rs 15,000, no employer is obligated to contribute more than 12% of Rs 15,000, i.e., Rs 1,800. If you have been contributing on a salary above Rs 15,000, you can reduce it to 12% of Rs 15,000.

Supreme Court Ruling: Maratwada Gramin Bank Case

In the Maratwada Gramin Bank case, the Supreme Court ruled that an employer who has been contributing to PF on a salary above the threshold limit can reduce their contribution to the prescribed percentage on the threshold limit at any time. Therefore, you can reduce the contribution but not below the prescribed limit of Rs 15,000.

Hi, thank you again! Our salary structure comprises basic and HRA/some other allowance. So, 70% of our gross is essentially our basic. Most of my employees have a basic salary below 15,000. However, we are essentially giving 24% of 70%, which becomes a huge amount considering the number of employees we have versus 24% of, say, 35-50% basic.

Different salary structures within the same company

1. Can I have a 70% basic for one class of employees and, say, 50% for another class of employees in the same company (in other words, different structures in the same company + lesser amount of PF to the department in this case)?

Reducing the basic percentage for the entire company

2. How can I reduce the basic percentage for the entire company at once? Is it possible?

How do you give 24% of 70% of the salary? Is this 24% inclusive of the employees' share? Don't you deduct 12% from the employees?

Legal Implications of PF Contributions

As already elaborated, if your PF qualifying salary is below Rs 15,000, then it will be an issue. It is true that the EPF Enforcement Officer cannot question your pattern of salary, nor can he direct that you should pay minimum wages. However, if the wages on which PF is contributed are less than Rs 15,000, then he can certainly direct you to pay it on the "basic wages" as per the EPF and MP Act. Basic wages as per the said Act are the total salary. Then it will become a legal issue.

So far, there is no inspection by the officer concerned; you can continue the present system. However, reducing the PF qualifying salary will invite legal consequences. An employer cannot reduce the wages on which PF is being contributed. If you do so, it will be a violation of section 12 of the EPF & MP Act. At the same time, if you have been contributing on a salary above Rs 15,000, then you can reduce it to Rs 15,000, and such action will not attract section 12. But in your case, the PF qualifying wages are already less than Rs 15,000. A further reduction in it is not legally possible.

Thank you so much! So, we will keep the same for the laborers. We can maintain a different percentage in the salary structure (say 35-50% basic of total salary) for office staff.