Are Conveyance and Defray Allowances Part of EPF? Plus, What's in Retaining Allowance?

Dear All,

We all know that the Employee Provident Fund (EPF) calculation includes the basic salary and other components, excluding the House Rent Allowance (HRA), at a rate of 12%. Could anyone shed some light on whether the conveyance allowance, which is fixed at different amounts according to grades, and Defray Allowance should also be considered in the EPF calculation?

Retaining Allowance

Also, what is included under the heading of Retaining Allowance?

Thank you very much.

Regards, SN
Location: India
Tags: conveyance allowance, EPF calculation, retaining allowance, salary components

The Employee Provident Fund (EPF) in India is calculated based on the basic salary and dearness allowance (if any) at a rate of 12%. Other allowances, such as Conveyance and Defray Allowance, are typically not included in the calculation of the EPF.

Conveyance Allowance: This is an allowance paid by the employer to cover the travel expenses of the employee from home to work and vice versa. The amount can vary based on the grade or level of the employee in the organization. As per the EPF Act, 1952, conveyance allowance is not a part of the basic wages and hence it is not considered for EPF calculation.

Defray Allowance: This is usually an allowance given to employees for expenses incurred in the performance of duties. The treatment of Defray Allowance in EPF calculation would depend on the nature and conditions of this allowance, but it is generally not considered for EPF calculation.

Retaining Allowance: Retaining Allowance is an allowance paid to an employee to retain them in the service of the employer. The components included in the Retaining Allowance can vary from organization to organization and are typically determined based on the terms of employment. However, as per the EPF Act, Retaining Allowance is considered as part of basic wages and hence should be considered for EPF calculation.

It is always recommended to check with a local labor law advisor or the EPFO to get the most accurate information as the interpretation of these laws can vary.

EPF Contribution and Salary Components

For the purpose of EPF contribution, all fixed components of salary as per the contract of employment should be considered. HRA, as a compensatory allowance only, can be excluded. A compensatory allowance means an allowance paid to an employee to compensate for a cost. As such, if an employee is residing in leased accommodation to come to the office, then only the HRA can be excluded. However, since the term HRA is used in the exclusion part of the definition of wages, it is usually considered as excluded from the PF contributing wages.

Conveyance Allowance

Conveyance allowance, on the other hand, is not found excluded from the wages, and therefore, it should be part of wages for contributing PF.

Retaining Allowance

Retaining allowance is salary only. It is not paid as a component of salary to employees of an establishment that is running, but it is paid to the employees of an establishment that is not presently operational. Such an establishment will not pay wages to its employees. At the same time, they would like some of the employees to be called back when the operations resume. In order to 'retain' them and avoid them joining other establishments, they will pay salary every month, and that salary is called retaining allowance. Normally, PF is paid on the wages earned by the workers while on duty. That is why PF is not attracted to leave encashment or retrenchment compensation paid. But retaining allowance is considered as wages, and PF is also payable on those wages even though the workers earn them without working.

In short, PF is payable on total wages except HRA. But to reduce the burden of PF, if you structure your salary in such a way that the HRA is abnormally big in value, then the EPFO will certainly ask whether HRA is paid to all employees or is it paid only to those employees who are residing in leased houses or not. In order to qualify for exclusion, a similar allowance should not be available to the spouse of the employee also. It is also a common finding that an employee who is paid minimum wages, say Rs 15,000 or less than that, will not be paid any compensatory allowance like HRA. Therefore, if your wages are less than Rs 15,000, it is not at all wise to have HRA as a component of salary.