Respected all,
With reference to the Supreme Court judgment, every company is going to change its salary structure. We have a significant number of workers with an approximate gross salary of 15,000. Can we adjust our salary structure to be 60% basic and 40% of the gross salary? The minimum wage is about 6,400 per month, and our current structure is as follows:
Current Salary Structure
Basic HRA CA Uniform Allowance Medical Allowance Gross Salary
6413 2952 2952 1476 967 14760
Proposed Salary Structure
Basic Salary: 8856 (60% of gross salary)
HRA: 5904 (40% of gross salary)
Is this structure feasible? Kindly advise me in this context. If there are any issues with the aforementioned salary structure, please let me know. Your valuable suggestions will be highly appreciated.
From India, Shimla
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With reference to the Supreme Court judgment, every company is going to change its salary structure. We have a significant number of workers with an approximate gross salary of 15,000. Can we adjust our salary structure to be 60% basic and 40% of the gross salary? The minimum wage is about 6,400 per month, and our current structure is as follows:
Current Salary Structure
Basic HRA CA Uniform Allowance Medical Allowance Gross Salary
6413 2952 2952 1476 967 14760
Proposed Salary Structure
Basic Salary: 8856 (60% of gross salary)
HRA: 5904 (40% of gross salary)
Is this structure feasible? Kindly advise me in this context. If there are any issues with the aforementioned salary structure, please let me know. Your valuable suggestions will be highly appreciated.
From India, Shimla
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Hi,
You have misunderstood the recent judgment of the SC, in my opinion. All fixed components of the breakup will attract PF, as per my understanding. HRA will also attract PF. Otherwise, many companies keep HRA only in their salary breakup to avoid PF liability.
Request you to read the judgment again or consult a good consultant.
My opinion..
From India, Pune
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176You have misunderstood the recent judgment of the SC, in my opinion. All fixed components of the breakup will attract PF, as per my understanding. HRA will also attract PF. Otherwise, many companies keep HRA only in their salary breakup to avoid PF liability.
Request you to read the judgment again or consult a good consultant.
My opinion..
From India, Pune
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HRA is also a part of the salary as per the current apex court verdict. To claim HRA as an allowance, the employer has to either pay the rent directly to the landlord or obtain a copy of the rent receipts (Form 12BB of income tax will work perfectly on the subject). As per the current verdict, all components that do not qualify as exempt allowance under income tax are now to be added in EPF salary as well. Overtime is the only exemption, but it is subject to the permission of the inspector of factories/shop & establishment.
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I am sorry to state that you are wrong in stating that HRA is included for the calculation of PF. Please find below the excerpt from the judgment:
Bridge & Roof (supra)
"The aforesaid provisions fell for detailed consideration by this Court when it was observed as follows:
7. The main question, therefore, that falls for decision is as to which of these two rival contentions is in consonance with s. 2(b). There is no doubt that "basic wages," as defined therein, means all emoluments which are earned by an employee while on duty or on leave with wages in accordance with the terms of the contract of employment and which are paid or payable in cash. If there were no exceptions to this definition, there would have been no difficulty in holding that production bonus, whatever its nature, would be included within these terms. The difficulty, however, arises because the definition also provides that certain things will not be included in the term "basic wages," and these are contained in three clauses. The first clause mentions the cash value of any food concession, while the third clause mentions presents made by the employer. The fact that the exceptions contain even presents made by the employer shows that though the definition mentions all emoluments which are earned in accordance with the terms of the contract of employment, care was taken to exclude presents which would ordinarily not be earned in accordance with the terms of the contract of employment. Similarly, though the definition includes "all emoluments" which are paid or payable in cash, the exception excludes the cash value of any food concession, which in any case was not payable in cash. The exceptions, therefore, do not seem to follow any logical pattern which would be in consonance with the main definition.
8. Then we come to clause (ii). It excludes dearness allowance, house rent allowance, overtime allowance, bonus, commission, or any other similar allowance payable to the employee in respect of his employment or of work done in such employment. This exception suggests that even though the main part of the definition includes all emoluments which are earned in accordance with the terms of the contract of employment, certain payments which are, in fact, the price of labor and earned in accordance with the terms of the contract of employment are excluded from the main part of the definition of "basic wages." It is undeniable that the exceptions contained in clause (ii) refer to payments which are earned by an employee in accordance with the terms of his contract of employment. It was admitted by counsel on both sides before us that it was difficult to find any one basis for the exceptions contained in the three clauses. It is clear, however, from clause (ii) that from the definition of the word "basic wages," certain earnings were excluded, though they must be earned by employees in accordance with the terms of the contract of employment. Having excluded "dearness allowance" from the definition of "basic wages," s. 6 then provides for the inclusion of dearness allowance for purposes of contribution. But that is clearly the result of the specific provision in s. 6 which lays down that contribution shall be 6 1/4 percent of the basic wages, dearness allowance, and retaining allowance (if any). We must therefore try to discover some basis for the exclusion in clause (ii) as also the inclusion of dearness allowance and retaining allowance (for any) in s. 6. It seems that the basis of inclusion in s. 6 and exclusion in clause (ii) is that whatever is payable in all concerns and is earned by all permanent employees is included for the purpose of contribution under s. 6, but whatever is not payable by all concerns or may not be earned by all employees of a concern is excluded for the purpose of contribution. Dearness allowance, for example, is payable in all concerns either as an addition to basic wages or as a part of consolidated wages where a concern does not have separate dearness allowance and basic wages. Similarly, retaining allowance is payable to all permanent employees in all seasonal factories like sugar factories and is therefore included in s. 6; but house rent allowance is not paid in many concerns and sometimes in the same concern it is paid to some employees but not to others, for the theory is that house rent is included in the payment of basic wages plus dearness allowance or consolidated wages. Therefore, house rent allowance, which may not be payable to all employees of a concern and which is certainly not paid by all concerns, is taken out of the definition of "basic wages," even though the basis of payment of house rent allowance where it is paid is the contract of employment. Similarly, overtime allowance, though it is generally in force in all concerns, is not earned by all employees of a concern. It is also earned in accordance with the terms of the contract of employment; but because it may not be earned by all employees of a concern, it is excluded from "basic wages." Similarly, commission or any other similar allowance is excluded from the definition of "basic wages" for commission and other allowances are not necessarily to be found in all concerns; nor are they necessarily earned by all employees of the same concern, though where they exist they are earned in accordance with the terms of the contract of employment. It seems, therefore, that the basis for the exclusion in clause (ii) of the exceptions in s. 2(b) is that all that is not earned in all concerns or by all employees of a concern is excluded from basic wages. To this, the exclusion of dearness allowance in clause (ii) is an exception. But that exception has been corrected by including dearness allowance in s. 6 for the purpose of contribution. Dearness allowance, which is an exception in the definition of "basic wages," is included for the purpose of contribution by s. 6, and the real exceptions, therefore, in clause (ii) are the other exceptions beside dearness allowance, which has been included through s. 6."
It is clearly evident that the SC has used its earlier decision to exclude HRA for calculation of PF as it is not an allowance that is uniformly paid across organizations to everybody.
From India, Hyderabad
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Bridge & Roof (supra)
"The aforesaid provisions fell for detailed consideration by this Court when it was observed as follows:
7. The main question, therefore, that falls for decision is as to which of these two rival contentions is in consonance with s. 2(b). There is no doubt that "basic wages," as defined therein, means all emoluments which are earned by an employee while on duty or on leave with wages in accordance with the terms of the contract of employment and which are paid or payable in cash. If there were no exceptions to this definition, there would have been no difficulty in holding that production bonus, whatever its nature, would be included within these terms. The difficulty, however, arises because the definition also provides that certain things will not be included in the term "basic wages," and these are contained in three clauses. The first clause mentions the cash value of any food concession, while the third clause mentions presents made by the employer. The fact that the exceptions contain even presents made by the employer shows that though the definition mentions all emoluments which are earned in accordance with the terms of the contract of employment, care was taken to exclude presents which would ordinarily not be earned in accordance with the terms of the contract of employment. Similarly, though the definition includes "all emoluments" which are paid or payable in cash, the exception excludes the cash value of any food concession, which in any case was not payable in cash. The exceptions, therefore, do not seem to follow any logical pattern which would be in consonance with the main definition.
8. Then we come to clause (ii). It excludes dearness allowance, house rent allowance, overtime allowance, bonus, commission, or any other similar allowance payable to the employee in respect of his employment or of work done in such employment. This exception suggests that even though the main part of the definition includes all emoluments which are earned in accordance with the terms of the contract of employment, certain payments which are, in fact, the price of labor and earned in accordance with the terms of the contract of employment are excluded from the main part of the definition of "basic wages." It is undeniable that the exceptions contained in clause (ii) refer to payments which are earned by an employee in accordance with the terms of his contract of employment. It was admitted by counsel on both sides before us that it was difficult to find any one basis for the exceptions contained in the three clauses. It is clear, however, from clause (ii) that from the definition of the word "basic wages," certain earnings were excluded, though they must be earned by employees in accordance with the terms of the contract of employment. Having excluded "dearness allowance" from the definition of "basic wages," s. 6 then provides for the inclusion of dearness allowance for purposes of contribution. But that is clearly the result of the specific provision in s. 6 which lays down that contribution shall be 6 1/4 percent of the basic wages, dearness allowance, and retaining allowance (if any). We must therefore try to discover some basis for the exclusion in clause (ii) as also the inclusion of dearness allowance and retaining allowance (for any) in s. 6. It seems that the basis of inclusion in s. 6 and exclusion in clause (ii) is that whatever is payable in all concerns and is earned by all permanent employees is included for the purpose of contribution under s. 6, but whatever is not payable by all concerns or may not be earned by all employees of a concern is excluded for the purpose of contribution. Dearness allowance, for example, is payable in all concerns either as an addition to basic wages or as a part of consolidated wages where a concern does not have separate dearness allowance and basic wages. Similarly, retaining allowance is payable to all permanent employees in all seasonal factories like sugar factories and is therefore included in s. 6; but house rent allowance is not paid in many concerns and sometimes in the same concern it is paid to some employees but not to others, for the theory is that house rent is included in the payment of basic wages plus dearness allowance or consolidated wages. Therefore, house rent allowance, which may not be payable to all employees of a concern and which is certainly not paid by all concerns, is taken out of the definition of "basic wages," even though the basis of payment of house rent allowance where it is paid is the contract of employment. Similarly, overtime allowance, though it is generally in force in all concerns, is not earned by all employees of a concern. It is also earned in accordance with the terms of the contract of employment; but because it may not be earned by all employees of a concern, it is excluded from "basic wages." Similarly, commission or any other similar allowance is excluded from the definition of "basic wages" for commission and other allowances are not necessarily to be found in all concerns; nor are they necessarily earned by all employees of the same concern, though where they exist they are earned in accordance with the terms of the contract of employment. It seems, therefore, that the basis for the exclusion in clause (ii) of the exceptions in s. 2(b) is that all that is not earned in all concerns or by all employees of a concern is excluded from basic wages. To this, the exclusion of dearness allowance in clause (ii) is an exception. But that exception has been corrected by including dearness allowance in s. 6 for the purpose of contribution. Dearness allowance, which is an exception in the definition of "basic wages," is included for the purpose of contribution by s. 6, and the real exceptions, therefore, in clause (ii) are the other exceptions beside dearness allowance, which has been included through s. 6."
It is clearly evident that the SC has used its earlier decision to exclude HRA for calculation of PF as it is not an allowance that is uniformly paid across organizations to everybody.
From India, Hyderabad
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Understanding HRA and Basic Wages
HRA, by definition, is outside the purview of "basic wages" under Section 2(b) of the Act. Components of wages like incentive bonus earnings, which are dependent on the output produced by the employee concerned, and other allowances that are not "universally" applicable to all employees or a category of employees, should not be included in the basic wages for calculating PF, as per the latest judgment of the Supreme Court.
Consequently, including HRA for the purpose of calculating PF would be erroneous.
From India, Nasik
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HRA, by definition, is outside the purview of "basic wages" under Section 2(b) of the Act. Components of wages like incentive bonus earnings, which are dependent on the output produced by the employee concerned, and other allowances that are not "universally" applicable to all employees or a category of employees, should not be included in the basic wages for calculating PF, as per the latest judgment of the Supreme Court.
Consequently, including HRA for the purpose of calculating PF would be erroneous.
From India, Nasik
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HRA is a subject of many departments, and if it gets taxable at one place, it would invite the attention of EPF as well. That's why we suggest employers to obtain a 12BB declaration from employees to prevent them from any unwanted queries from EPF.
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Basic Wages and Allowances
Basic wages include the dearness allowance (all cash payments by whatever name called, paid to an employee on account of a rise in the cost of living), retaining allowance, and the cash value of any food concession. However, 'basic wages' do not include the cash value of any food concession, dearness allowance, house rent allowance, overtime allowance, bonus, commission, or any other similar allowance payable to an employee in respect of his employment, nor any presents made by the employer.
As per the aforesaid matter, HRA is excluded from the basic salary. Therefore, you are requested to suggest whether the said salary structure is okay or not. I am not clear yet in this context.
From India, Shimla
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Basic wages include the dearness allowance (all cash payments by whatever name called, paid to an employee on account of a rise in the cost of living), retaining allowance, and the cash value of any food concession. However, 'basic wages' do not include the cash value of any food concession, dearness allowance, house rent allowance, overtime allowance, bonus, commission, or any other similar allowance payable to an employee in respect of his employment, nor any presents made by the employer.
As per the aforesaid matter, HRA is excluded from the basic salary. Therefore, you are requested to suggest whether the said salary structure is okay or not. I am not clear yet in this context.
From India, Shimla
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I completely agree with all the answers, but I have one question. If it's all about the salary head and breakup, should I keep only HRA in my salary breakup to avoid PF liability, bonus liability, gratuity liability, and all other social security benefits?
Example of Salary Breakup
For example:
Salary: 15,000 CTC
Salary breakup:
HRA: 15,000
Gross salary: 15,000
Does this mean the only liabilities would be ESIC and professional tax, with no other liabilities from the employer's side? (ESIC is applicable in areas for liability, otherwise no liability). Would there be no PF and other liabilities as the salary head is HRA?
I am raising a question, nothing else.
From India, Pune
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Example of Salary Breakup
For example:
Salary: 15,000 CTC
Salary breakup:
HRA: 15,000
Gross salary: 15,000
Does this mean the only liabilities would be ESIC and professional tax, with no other liabilities from the employer's side? (ESIC is applicable in areas for liability, otherwise no liability). Would there be no PF and other liabilities as the salary head is HRA?
I am raising a question, nothing else.
From India, Pune
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Though I am not quite clear about the thrust of the questions, I am still trying to address #8 to #11 above, making some assumptions. Payment of only HRA may sound a bit bizarre, besides falling foul with some other statutes, even assuming that the amount paid is above what is prescribed under the Minimum Wages Act that stipulates a Basic Wage and a Special Allowance. The authorities are sure to assume that the amount paid is camouflaged wages, and they are not far from the truth.
I am also assuming that the questionnaire has a problem with Dearness Allowance that is shown as excluded in the definition of basic wages under Sec. 2 (b). If you read further, either the Act or the Case, you will realize that DA is getting covered for PF under Sec 6. To my mind, it is an anachronism found in the Act itself.
Post the SC judgment, the thumb rule to apply is that if you pay any amount across the board without the recipient having to do anything special to earn it (like incentive bonus), it would amount to a "universal" allowance applicable to all attracting PF.
From India, Nasik
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I am also assuming that the questionnaire has a problem with Dearness Allowance that is shown as excluded in the definition of basic wages under Sec. 2 (b). If you read further, either the Act or the Case, you will realize that DA is getting covered for PF under Sec 6. To my mind, it is an anachronism found in the Act itself.
Post the SC judgment, the thumb rule to apply is that if you pay any amount across the board without the recipient having to do anything special to earn it (like incentive bonus), it would amount to a "universal" allowance applicable to all attracting PF.
From India, Nasik
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Basic salary is the key factor for all components, and HRA cannot exceed 40% of basic.
A knowledgeable HR professional will never allow the HR component to be split just based on percentages. Instead, they will engage the employee in a short discussion and request formal documents to avail the benefit of exempted allowances.
The HR job profile is not merely a routine task but requires coordination with all relevant departments, particularly those related to finance and labor.
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A knowledgeable HR professional will never allow the HR component to be split just based on percentages. Instead, they will engage the employee in a short discussion and request formal documents to avail the benefit of exempted allowances.
The HR job profile is not merely a routine task but requires coordination with all relevant departments, particularly those related to finance and labor.
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Dear All,
I am sharing herewith a recent Supreme Court judgment copy description by EPFO Vadodara chapter, Gujarat for your ready reference. I hope it will clear all your doubts. Please contact your regional EPFO office for any doubts regarding this presentation from EPFO itself.
All the best!!!
From India, Pune
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I am sharing herewith a recent Supreme Court judgment copy description by EPFO Vadodara chapter, Gujarat for your ready reference. I hope it will clear all your doubts. Please contact your regional EPFO office for any doubts regarding this presentation from EPFO itself.
All the best!!!
From India, Pune
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Dear All,
There is no way to save employer and employee liability. Only basic HRA ratio is a maximum of 60:40, or 70:30 if we increase the HRA percentage more than 40. EPFO will add the difference of HRA in basic wages and penalize them.
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There is no way to save employer and employee liability. Only basic HRA ratio is a maximum of 60:40, or 70:30 if we increase the HRA percentage more than 40. EPFO will add the difference of HRA in basic wages and penalize them.
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Respected All,
Thank you for your valuable suggestion on the aforementioned matter. One of my HR colleagues informed me that the company has changed its salary structure following the Supreme Court judgment. They have decided that, effective from 01/04/2019, the "Special Allowance" will now be referred to as "DEVELOPMENT ALLOWANCE" in your salary structure.
Please advise or share any insights you may have related to the DEVELOPMENT ALLOWANCE.
Thank you.
From India, Shimla
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Thank you for your valuable suggestion on the aforementioned matter. One of my HR colleagues informed me that the company has changed its salary structure following the Supreme Court judgment. They have decided that, effective from 01/04/2019, the "Special Allowance" will now be referred to as "DEVELOPMENT ALLOWANCE" in your salary structure.
Please advise or share any insights you may have related to the DEVELOPMENT ALLOWANCE.
Thank you.
From India, Shimla
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I attended a grievance program in Bangalore regarding the recent changes in the PF, where the PF assistant commissioner was the key speaker. He confirmed that HRA components will not attract PF. Many attendees raised questions about fixing the HRA percentage. Since there is no proper rule for salary structure, he mentioned it will be on a case-by-case basis.
As per my understanding, salary components vary depending on the location, such as cities, villages, hilly areas, or coastal areas. For example, HRA cannot be the same for a company situated in a city and a village. Typically, in towns, rent is higher, so we need to set a higher HRA in these places. We also have to consider the Income Tax treatment. If HRA is less than the actual rent paid, it will affect the ability to claim HRA exemption in IT. These issues apply only to those earning a salary of less than 15K.
My suggestion is to fix HRA at 20%-40% of the gross salary (24% is the safest option since government organizations in Bangalore maintain the same) if you are in a town. It is important to note that PF officials have the authority to question your salary components, so you should have proper justification for your policy.
From India, Bengaluru
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As per my understanding, salary components vary depending on the location, such as cities, villages, hilly areas, or coastal areas. For example, HRA cannot be the same for a company situated in a city and a village. Typically, in towns, rent is higher, so we need to set a higher HRA in these places. We also have to consider the Income Tax treatment. If HRA is less than the actual rent paid, it will affect the ability to claim HRA exemption in IT. These issues apply only to those earning a salary of less than 15K.
My suggestion is to fix HRA at 20%-40% of the gross salary (24% is the safest option since government organizations in Bangalore maintain the same) if you are in a town. It is important to note that PF officials have the authority to question your salary components, so you should have proper justification for your policy.
From India, Bengaluru
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Dear Muhammed Asif,
Our company is situated in Panchkula city. We can offer 60% of the basic salary and 40% of the gross salary as House Rent Allowance (HRA). Is this admissible? Kindly share your thoughts if you have any information regarding development allowance. I am eagerly awaiting your valuable suggestions.
Thank you.
From India
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Our company is situated in Panchkula city. We can offer 60% of the basic salary and 40% of the gross salary as House Rent Allowance (HRA). Is this admissible? Kindly share your thoughts if you have any information regarding development allowance. I am eagerly awaiting your valuable suggestions.
Thank you.
From India
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Dear Gaurav,
Whether the cost of living in your city is higher? As per my knowledge, the city Panchkula is a small city, so living costs are assumed to be lower. My suggestion is that you can fix the HRA at 30%. It would be better to consult your PF office regarding HRA and development allowance for more clarity, as they are the authority to inspect your organization.
Thank you.
From India, Bengaluru
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Whether the cost of living in your city is higher? As per my knowledge, the city Panchkula is a small city, so living costs are assumed to be lower. My suggestion is that you can fix the HRA at 30%. It would be better to consult your PF office regarding HRA and development allowance for more clarity, as they are the authority to inspect your organization.
Thank you.
From India, Bengaluru
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