Dear Professionals,
Our establishment is registering under the Provident Fund (PF) for the first time. We are receiving different suggestions from our employees regarding the wage limits for PF contributions. Some employees are asking to consider the wage limit of ₹15,000, while others are suggesting that their PF be deducted on their full basic salary, even if it exceeds ₹15,000 (for example, ₹50,000).
Can we apply different wage limits for different employees?
What would be the best approach?
Thank you in advance for your guidance.
From India, Chennai
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Our establishment is registering under the Provident Fund (PF) for the first time. We are receiving different suggestions from our employees regarding the wage limits for PF contributions. Some employees are asking to consider the wage limit of ₹15,000, while others are suggesting that their PF be deducted on their full basic salary, even if it exceeds ₹15,000 (for example, ₹50,000).
Can we apply different wage limits for different employees?
What would be the best approach?
Thank you in advance for your guidance.
From India, Chennai
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Hi,
EPF contribution guidelines
- EPF is mandatory for monthly wages up to ₹15,000 (excluding HRA or variable pays) with 20 or more employees.
- Once EPF is registered, even if the number of employees falls below 20, contributions must be paid and continued.
- It is not mandatory to contribute to EPF if wages are above ₹15,000; however, it is considered a best practice to remain competitive in the market and uphold employee standards. The majority of establishments contribute based on actual wages (Basic) and include it as part of CTC.
- If an employer chooses to adhere to the ₹15,000 limit, VPF is an option for employees to contribute amounts above ₹15,000 in wages.
From India, Bangalore
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2EPF contribution guidelines
- EPF is mandatory for monthly wages up to ₹15,000 (excluding HRA or variable pays) with 20 or more employees.
- Once EPF is registered, even if the number of employees falls below 20, contributions must be paid and continued.
- It is not mandatory to contribute to EPF if wages are above ₹15,000; however, it is considered a best practice to remain competitive in the market and uphold employee standards. The majority of establishments contribute based on actual wages (Basic) and include it as part of CTC.
- If an employer chooses to adhere to the ₹15,000 limit, VPF is an option for employees to contribute amounts above ₹15,000 in wages.
From India, Bangalore
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It is always good to follow a uniform system for all employees. If the employer's contribution is not expected to be on a maximum salary of Rs 15,000, then make it common for all employees. It is true that employees can opt to contribute based on a higher salary so that they will benefit from the 80C tax exemption. However, if you allow this at this stage, you will face a lot of adjustments in the HRMS/payroll software. Therefore, to start with, make the PF applicable only to those whose PF qualifying salary (let it be gross salary without HRA and variable pay) is not above Rs 15,000.
You should also inquire if there are any employees who are existing members of EPF as declared in their Form 11; if available, they should also be brought under EPF now. In the future, you can consider individual options of higher contribution, i.e., contribution at a higher rate or based on a higher basic salary.
From India, Kannur
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You should also inquire if there are any employees who are existing members of EPF as declared in their Form 11; if available, they should also be brought under EPF now. In the future, you can consider individual options of higher contribution, i.e., contribution at a higher rate or based on a higher basic salary.
From India, Kannur
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Thank you, Suraj Sir and Madhu Sir, for your insights. I wanted to inquire about how we should structure the bifurcation of salaries, as currently, 100% of the CTC is being considered as the basic salary, with no allowances provided. This has resulted in a higher basic for all employees.
Salary Bifurcation Inquiry
For instance, if the CTC is ₹50,000, what percentage should be allocated as the basic salary, and how much should be considered as the employer's contribution towards PF (if we keep a minimum of Rs 1800 as PF)? Should we introduce any other allowances to keep the basic salary at a minimum level, and if so, what should be the percentage of CTC?
Since we are a new organization and haven't established any salary bifurcation yet, we believe it's prudent to implement one now as the company continues to grow steadily.
From India, Chennai
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Salary Bifurcation Inquiry
For instance, if the CTC is ₹50,000, what percentage should be allocated as the basic salary, and how much should be considered as the employer's contribution towards PF (if we keep a minimum of Rs 1800 as PF)? Should we introduce any other allowances to keep the basic salary at a minimum level, and if so, what should be the percentage of CTC?
Since we are a new organization and haven't established any salary bifurcation yet, we believe it's prudent to implement one now as the company continues to grow steadily.
From India, Chennai
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Salary Bifurcation and Legal Implications
There is no rule that mandates salary bifurcation, nor that only a certain amount should be treated as basic pay. According to the law, the salary as per the employment contract is considered wages/salary. This is the basis for contributions to ESI, EPF, Bonus, Gratuity, etc. However, each Act prescribes certain threshold limits, and employees earning more than these amounts are excluded from coverage. For instance, an employee whose wages exceed Rs 21,000 per month is not covered by ESI and Bonus. Similarly, an employee whose wages exceed Rs 15,000 at the time of joining is not required to receive PF. Nonetheless, the entire amount is considered wages for gratuity computation.
Unwritten HR Practices
HR professionals often adopt unwritten practices by categorizing some salary elements as 'allowances.' This involves showing a minimal amount as Basic Wages and a larger portion as allowances to reduce statutory contributions towards PF, Bonus, Gratuity, etc. However, this practice lacks legal sanctity, and employers may still be held responsible for statutory contributions based on gross salary. Allowances not fixed by amounts and paid based on employee category or location are not part of the salary. Yet, many HRs disregard this rule, categorizing components as allowances outside the scope of wages.
Understanding Remuneration
Legally, all earnings by an employee are considered remuneration. Salary increases occur for two reasons: to compensate for the rising cost of living and to reward performance. The former is reflected in dearness allowance, and the latter in basic wages. Unfortunately, many private companies do not pay DA, and increases are often added under allowances. If brought to the authorities, it can be established that these allowances are part of wages.
Establishing a Clear Salary Structure
To avoid future confusion and risks, it's advisable to have a salary structure with basic salary, dearness allowance, and other allowances varying by employee category and location. The basic pay and dearness allowance should always exceed the minimum wages set by the state government, protecting the employer to some extent.
Conclusion on Bifurcation
In short, bifurcation is merely an artificial arrangement. Numerous judgments state that the total salary per the employment contract represents the legal wages for calculating gratuity, PF, or other benefits. Any attempt to treat the least amount as basic wages is arbitrary. In Surya Rashmi Ltd Vs Employees Provident Fund, Justice Sinha noted that allowances were essentially part of the basic wage, camouflaged as allowances to avoid deductions and contributions to the Provident Fund.
Therefore, bifurcating the salary offers no real advantage. However, when an employer is bound only to pay statutory wages, the minimum wages set by the state, they can bifurcate remuneration into basic wages, which should be equal to or more than the minimum wages, and allowances of their choice.
From India, Kannur
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There is no rule that mandates salary bifurcation, nor that only a certain amount should be treated as basic pay. According to the law, the salary as per the employment contract is considered wages/salary. This is the basis for contributions to ESI, EPF, Bonus, Gratuity, etc. However, each Act prescribes certain threshold limits, and employees earning more than these amounts are excluded from coverage. For instance, an employee whose wages exceed Rs 21,000 per month is not covered by ESI and Bonus. Similarly, an employee whose wages exceed Rs 15,000 at the time of joining is not required to receive PF. Nonetheless, the entire amount is considered wages for gratuity computation.
Unwritten HR Practices
HR professionals often adopt unwritten practices by categorizing some salary elements as 'allowances.' This involves showing a minimal amount as Basic Wages and a larger portion as allowances to reduce statutory contributions towards PF, Bonus, Gratuity, etc. However, this practice lacks legal sanctity, and employers may still be held responsible for statutory contributions based on gross salary. Allowances not fixed by amounts and paid based on employee category or location are not part of the salary. Yet, many HRs disregard this rule, categorizing components as allowances outside the scope of wages.
Understanding Remuneration
Legally, all earnings by an employee are considered remuneration. Salary increases occur for two reasons: to compensate for the rising cost of living and to reward performance. The former is reflected in dearness allowance, and the latter in basic wages. Unfortunately, many private companies do not pay DA, and increases are often added under allowances. If brought to the authorities, it can be established that these allowances are part of wages.
Establishing a Clear Salary Structure
To avoid future confusion and risks, it's advisable to have a salary structure with basic salary, dearness allowance, and other allowances varying by employee category and location. The basic pay and dearness allowance should always exceed the minimum wages set by the state government, protecting the employer to some extent.
Conclusion on Bifurcation
In short, bifurcation is merely an artificial arrangement. Numerous judgments state that the total salary per the employment contract represents the legal wages for calculating gratuity, PF, or other benefits. Any attempt to treat the least amount as basic wages is arbitrary. In Surya Rashmi Ltd Vs Employees Provident Fund, Justice Sinha noted that allowances were essentially part of the basic wage, camouflaged as allowances to avoid deductions and contributions to the Provident Fund.
Therefore, bifurcating the salary offers no real advantage. However, when an employer is bound only to pay statutory wages, the minimum wages set by the state, they can bifurcate remuneration into basic wages, which should be equal to or more than the minimum wages, and allowances of their choice.
From India, Kannur
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PF Contribution on not less than Minimum Wage.pdf