Is It Legal for My Company to Avoid Paying PF by Adjusting Basic Salaries? Seeking Guidance!

I recently joined a software company as Manager HR and found that the company is not paying PF to anybody. The employee strength is 40 right now, and the company started a year ago. We are planning to hire about 50 more people by next year. What they do is, they don't pay anyone the basic salary less than 6500 even when the salary is around 9k. So I want to know whether it's legal or not. Please guide me on the same.

Awaiting your response.

Hi Deepa,

It is mandatory for a company employing 20 or more persons to have their employees covered under PF. If the company has not done so till date, then you will have to strongly suggest that they do it. The site <link no longer exists - removed> provides quite a bit of information on this.

Emereen

Hi Deepa,

There is a waiting period of three years for every company. It is provided for in the PF Act itself. You mentioned that your company is just one year old, and hence, legally, for three years, you do not come under the purview of the Act.

After three years, you have to take a number. But if all employees are drawing more than 6500 rupees as Basic plus DA, you do not need to cover these employees legally. This is the legal position.

Siva

Thanks Emreen and Siva. Now, my question to Mr. Siva is, can we decide the basic salary as per our convenience? For example, if the monthly salary is 8k for an employee, can we give a basic of 7000 to him? There must be some formula to calculate the basic salary.

Dear Deepa,

You can give Basic plus DA, put together should not be too low. I have come across situations where Basic and DA are at 40%, with other allowances contributing 60%. There are organizations that give more Basic and less in allowances. The law does not prevent you from giving more basic; it prescribes a minimum basic and DA under the Minimum Wages Act. If you give more, it is the organization's wish.

Siva

Dear Deepa,

As per the PF Act, if an employee's monthly basic and DA add up to more than Rs 6500, the company has the option of not deducting PF from the employee provided the employee agrees to it. Also, the calculation of Basic Salary is usually 40-50% of your Gross Salary.

Regards, Juin

It is optional if the basic salary exceeds Rs. 6500/-. However, if there is PF deduction already made below Rs. 6500/- in the establishment, then the consent of the employee is required. Below Rs. 6500/-, PF deduction is mandatory. This culture is most prevalent in call center industries where maximum attrition is reported. In the absence of PF deduction, no statutory register in respect of PF is required to be maintained.

Regarding your second question, please note that in the case of a minimum salary, e.g., in Haryana Rs. 3510/-, the basic salary is to be kept at Rs. 3510/-. Where the salary is higher, the basic salary can be put in the range of 40-50% of CTC. This is what most companies follow.

Regards,

Thank you, Mr. Singh. I know Provident Fund (PF) is an important component for an employee, but my director thinks that there is a lot of tension and problems involved in this process, so he is not ready to implement this component. How can I convince him to consider implementing it?

I have a question here, don't know how relevant it would be, still!!! :D

We talked about flexibility in deciding the basic salary, but none of us talked about HRA, which is always linked to the Basic salary. If we keep the Basic salary close to CTC, we will have no scope for HRA then. Minimum HRA has to be 50/60% of the CTC. Comments invited. Thanks.

Best Wishes,

Rajiv Naithani

No doubt, there is a lot of tension involved in keeping records, ensuring timely returns, and inspecting records from the PF office, along with dealing with any potential illegal gratification if mistakes are reported in the returns submitted to them. This process consumes non-productive time in maintaining all these records. However, above all, PF is what we rely on for our retirement.

If your employer pays you enough to save a good amount of money for rainy days, then it can be avoided. Nowadays, there are many other avenues where investments can yield good returns. But if they pay moderately, having a PF scheme is a must, and they should be convinced to introduce it in your establishment. This is also one of the components that attract new employees and reflect the employer's intentions regarding their employees' welfare. If the employer is solely money-oriented and focused on profit, it may be a waste of time to try to convince them.

Regards,

The infancy protection, that is to say a company will be covered by EPF only after three years, is not in force now. Hence, right on the day on which the total number of paid employees exceeds 19 (i.e., becomes 20), the company is covered under the EPF Act. It is immaterial whether the company pays a salary of more than Rs 6500, the limit prescribed, but only those drawing not more than 6500 will be covered. This amount is calculated taking into account both the Basic salary and the Dearness allowance. If the company has a definite DA policy that is to be followed, otherwise, industrial Variable DA applicable to the particular industry has to be given (VDA is based on the consumer price index published by the Dept. of Economic and Statistics and is required to be followed wherever Minimum Wages Act is followed).

In case your company pays more than 6500 (right at the time of joining itself), then those employees are uncovered, but if the number of employees exceeds 20, naturally, the company is to be covered.

Whenever an employee is appointed on a salary of less than 6500, he will be covered. There are possibilities of raising the salary limit from 6500 to 7500 or more. In such occasions, many existing employees get covered, and once covered, they become under the EPF irrespective of any hike in salary. Therefore, it is not wise also to show the salary at a higher rate just to avoid EPF implementation. Remember that sweepers and office boys are also employees, and I do not think that they are also paid more than 6500!!

Regards,

Madhu.T.K

Hi,

As I understand, you are asking why they are giving 6500/- as the minimum basic even if a guy's salary is 9000. Then please note that there is no compulsion on the basic salary. But yes, if they are going to give you a proper salary structure and salary slip, then it will be a headache for the HR over there to describe the salary structure, as a standard salary structure should contain the following:

Basic
HRA (40 or 50% of Basic)
Employer PF
Conveyance Allowance
DA
Special Allowance

Hope it's useful.

Regards,
Raul

If we analyze the components of salary on a percentage basis, the breakdown should be as follows:

- Basic should constitute 40%
- HRA should account for 20%
- Transportation Allowance ranges from $800 to $1200
- CCA and CEA can amount to 3%
- The remaining portion, categorized as "Rest Others," should be 30%

Thank you, everybody. I have learned more than what I was expecting from all your views and suggestions. Is there any law for group insurance or mediclaim as well?

Just check if your company is registered under the Factory Act or the Shop Act. There are different rules for both. Most of the software firms register themselves under the Shop Act as service providers, while larger ones opt for Software Parks to benefit from concessions for software development and exports.

sandeep_sable@rediffmail.com

Dear tsivasankaran,

To the best of my knowledge, there is no waiting period for newly established companies regarding PF coverage. This provision was deleted as of September 22, 1997. In the case of a new company, once 20 employees are employed, coverage under the EPF Act becomes mandatory.

This is for your information.

Haresh Shah