Salary Structure Inquiry for Delhi-Based Organization
I work with an organization based in Delhi. We are considering giving 18 employees a salary equivalent to the Minimum Wages as per Delhi. I would like to know if we can break the Minimum Wages into three components: Basic, HRA, and Special Allowance. This means we want to consider Minimum Wages as Gross Salary and not just the basic salary. The purpose of doing this is to increase the net take-home pay of the employees and reduce the CTC.
Please find below the detailed CTC Structure and guide accordingly:
Basic - 6675
HRA - 3338
Special Allowance - 3337
Gross (Minimum Wages) - 13,350
EPF - Employer Share (13.36% of 6675) - 892
ESI - Employer Share (4.75% of 13350) - 634
Bonus (8.33% of 6675) - 556
CTC - 15,432
Net Take Home - 12,315
Request your inputs, please.
Regards, Shweta Gehlot
From India, Delhi
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8I work with an organization based in Delhi. We are considering giving 18 employees a salary equivalent to the Minimum Wages as per Delhi. I would like to know if we can break the Minimum Wages into three components: Basic, HRA, and Special Allowance. This means we want to consider Minimum Wages as Gross Salary and not just the basic salary. The purpose of doing this is to increase the net take-home pay of the employees and reduce the CTC.
Please find below the detailed CTC Structure and guide accordingly:
Basic - 6675
HRA - 3338
Special Allowance - 3337
Gross (Minimum Wages) - 13,350
EPF - Employer Share (13.36% of 6675) - 892
ESI - Employer Share (4.75% of 13350) - 634
Bonus (8.33% of 6675) - 556
CTC - 15,432
Net Take Home - 12,315
Request your inputs, please.
Regards, Shweta Gehlot
From India, Delhi
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You have not mentioned the minimum wages category.
The bonus does not comply with the rules. Kindly refer to the Gazette Notification. The bonus must be at least equal to the minimum wages.
thpaycommissionnews.in/payment-of-bonus-act-amendment-gazette-notification/
From India, Delhi
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The bonus does not comply with the rules. Kindly refer to the Gazette Notification. The bonus must be at least equal to the minimum wages.
thpaycommissionnews.in/payment-of-bonus-act-amendment-gazette-notification/
From India, Delhi
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You cannot split minimum wages if you are paying only minimum wages as per notification. PF, gratuity, and bonus should be based on minimum wages as per notification. Anything paid above minimum wages can be split into other components like HRA, CA, etc.
From India, New Delhi
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From India, New Delhi
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HRA Applicability in Delhi
HRA is not applicable in the state of Delhi. However, the employer can provide it if they choose to.
Splitting Minimum Wages
Yes, you can split the Minimum Rate of Wage. Note that Basic Wage is an integral part of the wage recognized under Section 2(h) of the Minimum Wages Act.
Special Allowance and EPF Contribution
Kindly note that Special Allowance will attract EPF contribution in accordance with Section 2(b) and Section 6 of the EPF & MP Act.
Employer Contribution Changes
The employer contribution has changed to 13.15% from 13.56%, which will be applicable from April 1, 2017.
Regards,
HR Board
www.boardhr.blogspot.in
From India, Mumbai
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HRA is not applicable in the state of Delhi. However, the employer can provide it if they choose to.
Splitting Minimum Wages
Yes, you can split the Minimum Rate of Wage. Note that Basic Wage is an integral part of the wage recognized under Section 2(h) of the Minimum Wages Act.
Special Allowance and EPF Contribution
Kindly note that Special Allowance will attract EPF contribution in accordance with Section 2(b) and Section 6 of the EPF & MP Act.
Employer Contribution Changes
The employer contribution has changed to 13.15% from 13.56%, which will be applicable from April 1, 2017.
Regards,
HR Board
www.boardhr.blogspot.in
From India, Mumbai
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Minimum Wage Regulation and Court Rulings
It is considered a bad practice, though in one case, the Supreme Court has stated that minimum wage regulation was intended to cover gross wages and not only the basic salary. In many other instances, courts have ordered employers to pay an additional amount since both basic and special allowances together are notified as minimum wages.
The matter regarding minimum wages is currently being heard by the Supreme Court, which is consolidating all cases from various high courts. The judgment is likely to oppose breaking up the wages. If it comes as a clarification rather than an amendment, it will probably have a retrospective effect.
PF and Bonus Payment Considerations
In any case, as others have pointed out, your PF payment will be computed on both the basic and special allowance, not just on the basic. The special allowance is equivalent to DA.
Additionally, the payment of a bonus on a monthly basis is invalid. It becomes a part of the salary, and you will be liable for the payment of the bonus separately at the end of the year.
From India, Mumbai
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It is considered a bad practice, though in one case, the Supreme Court has stated that minimum wage regulation was intended to cover gross wages and not only the basic salary. In many other instances, courts have ordered employers to pay an additional amount since both basic and special allowances together are notified as minimum wages.
The matter regarding minimum wages is currently being heard by the Supreme Court, which is consolidating all cases from various high courts. The judgment is likely to oppose breaking up the wages. If it comes as a clarification rather than an amendment, it will probably have a retrospective effect.
PF and Bonus Payment Considerations
In any case, as others have pointed out, your PF payment will be computed on both the basic and special allowance, not just on the basic. The special allowance is equivalent to DA.
Additionally, the payment of a bonus on a monthly basis is invalid. It becomes a part of the salary, and you will be liable for the payment of the bonus separately at the end of the year.
From India, Mumbai
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Dear Saswata,
Appreciating your view on the concerned subject, no doubt such practice is not in the good health of PF member Social Security. Just to elucidate further on your points:
View 1 - Basic Wages for the Purpose of PF Contributions
The definition of 'Basic Wages' has been defined under Section 2(b) of the EPF & MP Act, 1952 as below:
Section 2(b) "basic wages" means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include:
- The cash value of any food concession;
- Any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), 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;
- Any presents made by the employer.
From the above definition, it is clear that all the emoluments which are earned by an employee other than those specifically excluded components given under clauses i, ii & iii, would be the basic wages for the purposes of contribution under the Act.
All the components viz basic wages, dearness allowance, and retaining allowance specified in Section 6 have been explained at Sec 2(b) and Section 6 categorically without leaving any room for ambiguity. The above definition has also been time and again called for by various judicial forums while deciding the cases filed against 7A orders, some of which are given below for ready reference:
The Hon'ble Division Bench of the High Court of Calcutta in the Regional Provident Fund Commissioner (II), West Bengal & Anr. v Vivekananda Vidya Mandir & Ors, 2005, had held that in order to exclude any allowance from the purview of Section 6, which provides for liability to pay contribution based on basic wages, such allowance should fall under Clauses (i), (ii), and (iii) of Section 2(b), which enumerate allowances that are not included in the definition of basic wages.
While the Hon'ble Supreme Court in Jay Engineering Works Ltd v Union of India, ruled that the expression 'any other similar allowance' should be of the same type as the allowances mentioned in the clause such as 'dearness allowance', 'house rent allowance', 'overtime allowance', 'bonus', and 'commission' as specifically excluded under Section 2(b) of the Act. The Hon'ble Gujarat High Court in the case of Gujarat Cypromet Ltd V Assistant Provident Fund Commissioner; and the Hon'ble High Court of Karnataka in the case of Group 4 Securities Guarding Ltd. v Regional Provident Fund Commissioner, had specifically stated that "Any agreement entered into between the employer and its employees for splitting of the amount payable by the employer to its employees for the service rendered by them, cannot take away the power of the Commissioner under Section 7A of the Act to look into the nature of the contract entered into between the employer and its employees and decide that splitting up of the pay payable to the employees under several heads is only subterfuge to avoid payment of contribution by the employer to the provident fund. It was open to the Commissioner to lift the veil and read between the lines to find out the pay structure fixed by the employer to its employees and to decide the question whether the splitting up of the pay has been made only as a subterfuge to avoid its contribution to the provident fund." Similarly, in Ponni Sugars and Chemicals Ltd., v. Cauvery Sugar and Chemicals Ltd., and others- 2001(91) FLR.486:2001(2) LLJ.1201:2002 LLR.25, it was held that the expression 'basic wages' has to receive an interpretation which would achieve the object of the enactment.
The Act has to be considered in its proper perspective and contextual so as to fructify the legislative intentions underlying the enactment. Even if two views are possible, the view which furthers the legislative intention should be preferred to the one which would frustrate it. Relevance is also made on the following landmark judgments which had always ruled that the beneficial intent of the Act is of paramount importance when there is an issue of deciding the due benefits, which are as below:
The Division Bench of the Hon'ble High Court of Andhra Pradesh has clearly stated in the Nazeena Traders (Private) Limited v The Regional Provident Fund Commissioner, that the EPF & MP Act, 1952 is a beneficial legislation enacted as a measure of social justice and should be construed liberally so as to confer benefit on the employees to the maximum extent and finally as per the guidelines laid down by the Hon'ble Supreme Court in The Regional Provident Fund Commissioner, Punjab v Shibu Metal Works 1964-65 (27) FJR 491, in construing the material provisions of the Act, if two views are reasonably possible, the Courts should prefer the view which helps the achievement and furtherance of the object, which is also clearly defined in Balbir Kaur and another v Steel Authority of India Ltd. and other; T.K. Meenakshi (Smt.) and another v Steel Authority of India Ltd. and Others as "to ensure better future of the employee concerned on his retirement and for the benefit of the dependants in case of his earlier death". Moreover, in the matter of State Vs. Girdhari Lal Bajaj, 1962 II LLJ 46 (Bom.DB), the Hon'ble Court observed that when there is doubt about their meaning, it is to be understood in the sense in which it best harmonizes with the subject of the enactment and the object which the legislature has in view. Being so, it is observed that some of the employers are in the habit of splitting the wages into various allowances with the predominant view of avoiding the PF contributions thereby jeopardizing the intent of Social security to their employees. In fact, there were instances where the employer is showing only 10% as basic wages while a major portion would be shown as Special Allowance, or Other Allowance or Conveyance or Over Time Allowance or HRA, etc. In case an employee earns a Gross Wage of say `6,000/-, then as per the salary structure followed by a particular establishment, around `2,700/- is shown as Basic, `2,400/- is shown as House Rent Allowance, `800/- is shown as Conveyance while the balance is paid as Special Allowance. The contributions were being paid by this establishment only on this `2,700/- being shown as basic. In case the above employee expires, the pension to the family would be paid based on the last drawn pay. In this case, the pension would only be calculated based on `2,700/- being the last drawn salary for which the contributions have been calculated. As per Table 'C' of the Employees' Pension Scheme, 1995, the equivalent widow pension for the last drawn salary of `2,700/- is `1,163/-. However, as per Section 2(b), the Basic wages in respect of this employee need to be construed as `3,600/-, duly excluding the House Rent Allowance as the same has been specifically excluded in the above definition. The equivalent widow pension for the basic of `3,600/- would be `1,521/-. This difference in pension would have a cascading effect on the Children Pension (being paid for 2 children at a time up to their age of 25 years in turn) and subsequently during the interim reliefs declared by the Government of India based on the actuarial valuation carried out. Therefore, the practice of this establishment contributing on their own basic (other than the one stipulated under Section 2(b)) would actually lower the employees' due benefits as explained above, and is not in the spirit of the EPF & MP Act, 1952 and the Schemes framed thereunder. Accordingly, the basic wages shown in the pay structure of the establishment need to be in tune with the definition provided under Sec 2(b). EPF & MP Act, 1952 being a self-application Act, the above provisions apply to the covered establishments on its own.
View 2 - Monthly Bonus
Your argument is accepted - As per Section 2(h) of the Minimum Wages Act.
Regards
HR Board
www.boardhr.blogspot.in
From India, Mumbai
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Appreciating your view on the concerned subject, no doubt such practice is not in the good health of PF member Social Security. Just to elucidate further on your points:
View 1 - Basic Wages for the Purpose of PF Contributions
The definition of 'Basic Wages' has been defined under Section 2(b) of the EPF & MP Act, 1952 as below:
Section 2(b) "basic wages" means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include:
- The cash value of any food concession;
- Any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), 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;
- Any presents made by the employer.
From the above definition, it is clear that all the emoluments which are earned by an employee other than those specifically excluded components given under clauses i, ii & iii, would be the basic wages for the purposes of contribution under the Act.
All the components viz basic wages, dearness allowance, and retaining allowance specified in Section 6 have been explained at Sec 2(b) and Section 6 categorically without leaving any room for ambiguity. The above definition has also been time and again called for by various judicial forums while deciding the cases filed against 7A orders, some of which are given below for ready reference:
The Hon'ble Division Bench of the High Court of Calcutta in the Regional Provident Fund Commissioner (II), West Bengal & Anr. v Vivekananda Vidya Mandir & Ors, 2005, had held that in order to exclude any allowance from the purview of Section 6, which provides for liability to pay contribution based on basic wages, such allowance should fall under Clauses (i), (ii), and (iii) of Section 2(b), which enumerate allowances that are not included in the definition of basic wages.
While the Hon'ble Supreme Court in Jay Engineering Works Ltd v Union of India, ruled that the expression 'any other similar allowance' should be of the same type as the allowances mentioned in the clause such as 'dearness allowance', 'house rent allowance', 'overtime allowance', 'bonus', and 'commission' as specifically excluded under Section 2(b) of the Act. The Hon'ble Gujarat High Court in the case of Gujarat Cypromet Ltd V Assistant Provident Fund Commissioner; and the Hon'ble High Court of Karnataka in the case of Group 4 Securities Guarding Ltd. v Regional Provident Fund Commissioner, had specifically stated that "Any agreement entered into between the employer and its employees for splitting of the amount payable by the employer to its employees for the service rendered by them, cannot take away the power of the Commissioner under Section 7A of the Act to look into the nature of the contract entered into between the employer and its employees and decide that splitting up of the pay payable to the employees under several heads is only subterfuge to avoid payment of contribution by the employer to the provident fund. It was open to the Commissioner to lift the veil and read between the lines to find out the pay structure fixed by the employer to its employees and to decide the question whether the splitting up of the pay has been made only as a subterfuge to avoid its contribution to the provident fund." Similarly, in Ponni Sugars and Chemicals Ltd., v. Cauvery Sugar and Chemicals Ltd., and others- 2001(91) FLR.486:2001(2) LLJ.1201:2002 LLR.25, it was held that the expression 'basic wages' has to receive an interpretation which would achieve the object of the enactment.
The Act has to be considered in its proper perspective and contextual so as to fructify the legislative intentions underlying the enactment. Even if two views are possible, the view which furthers the legislative intention should be preferred to the one which would frustrate it. Relevance is also made on the following landmark judgments which had always ruled that the beneficial intent of the Act is of paramount importance when there is an issue of deciding the due benefits, which are as below:
The Division Bench of the Hon'ble High Court of Andhra Pradesh has clearly stated in the Nazeena Traders (Private) Limited v The Regional Provident Fund Commissioner, that the EPF & MP Act, 1952 is a beneficial legislation enacted as a measure of social justice and should be construed liberally so as to confer benefit on the employees to the maximum extent and finally as per the guidelines laid down by the Hon'ble Supreme Court in The Regional Provident Fund Commissioner, Punjab v Shibu Metal Works 1964-65 (27) FJR 491, in construing the material provisions of the Act, if two views are reasonably possible, the Courts should prefer the view which helps the achievement and furtherance of the object, which is also clearly defined in Balbir Kaur and another v Steel Authority of India Ltd. and other; T.K. Meenakshi (Smt.) and another v Steel Authority of India Ltd. and Others as "to ensure better future of the employee concerned on his retirement and for the benefit of the dependants in case of his earlier death". Moreover, in the matter of State Vs. Girdhari Lal Bajaj, 1962 II LLJ 46 (Bom.DB), the Hon'ble Court observed that when there is doubt about their meaning, it is to be understood in the sense in which it best harmonizes with the subject of the enactment and the object which the legislature has in view. Being so, it is observed that some of the employers are in the habit of splitting the wages into various allowances with the predominant view of avoiding the PF contributions thereby jeopardizing the intent of Social security to their employees. In fact, there were instances where the employer is showing only 10% as basic wages while a major portion would be shown as Special Allowance, or Other Allowance or Conveyance or Over Time Allowance or HRA, etc. In case an employee earns a Gross Wage of say `6,000/-, then as per the salary structure followed by a particular establishment, around `2,700/- is shown as Basic, `2,400/- is shown as House Rent Allowance, `800/- is shown as Conveyance while the balance is paid as Special Allowance. The contributions were being paid by this establishment only on this `2,700/- being shown as basic. In case the above employee expires, the pension to the family would be paid based on the last drawn pay. In this case, the pension would only be calculated based on `2,700/- being the last drawn salary for which the contributions have been calculated. As per Table 'C' of the Employees' Pension Scheme, 1995, the equivalent widow pension for the last drawn salary of `2,700/- is `1,163/-. However, as per Section 2(b), the Basic wages in respect of this employee need to be construed as `3,600/-, duly excluding the House Rent Allowance as the same has been specifically excluded in the above definition. The equivalent widow pension for the basic of `3,600/- would be `1,521/-. This difference in pension would have a cascading effect on the Children Pension (being paid for 2 children at a time up to their age of 25 years in turn) and subsequently during the interim reliefs declared by the Government of India based on the actuarial valuation carried out. Therefore, the practice of this establishment contributing on their own basic (other than the one stipulated under Section 2(b)) would actually lower the employees' due benefits as explained above, and is not in the spirit of the EPF & MP Act, 1952 and the Schemes framed thereunder. Accordingly, the basic wages shown in the pay structure of the establishment need to be in tune with the definition provided under Sec 2(b). EPF & MP Act, 1952 being a self-application Act, the above provisions apply to the covered establishments on its own.
View 2 - Monthly Bonus
Your argument is accepted - As per Section 2(h) of the Minimum Wages Act.
Regards
HR Board
www.boardhr.blogspot.in
From India, Mumbai
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Thank you for taking the time to write a detailed report on the subject.
With reference to your initial view, you mentioned that PF is computed only on the basic salary.
Section 6: Contributions and Matters Provided for in Schemes
The contribution to be paid by the employer to the Fund shall be ten percent of the basic wages, dearness allowance, and retaining allowance, if any, payable to each employee, whether employed directly or through a contractor. The employee's contribution shall match the employer's contribution and may exceed ten percent of the basic wages, dearness allowance, and retaining allowance if desired by the employee. However, the employer is not obligated to pay more than their required contribution under this section.
It is noted that for certain establishments, as specified by the Central Government, the contribution rate is modified from "ten percent" to "twelve percent" as per notification in the Official Gazette.
Therefore, the section clearly states 10% (later modified to 12%) of basic, DA, and retaining allowance. The exclusion of DA from basic does not matter.
Furthermore, in all the court decisions you have referenced, you have missed those that have ruled contrary, indicating that PF should be calculated on full wages, including minimum wages. Notably, the 2011 decision of the Allahabad High Court led to the PF department releasing a circular stating PF is to be taken on full wages (later suspended on orders of the minister), and the Supreme Court has consolidated all appeals against this matter.
From India, Mumbai
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With reference to your initial view, you mentioned that PF is computed only on the basic salary.
Section 6: Contributions and Matters Provided for in Schemes
The contribution to be paid by the employer to the Fund shall be ten percent of the basic wages, dearness allowance, and retaining allowance, if any, payable to each employee, whether employed directly or through a contractor. The employee's contribution shall match the employer's contribution and may exceed ten percent of the basic wages, dearness allowance, and retaining allowance if desired by the employee. However, the employer is not obligated to pay more than their required contribution under this section.
It is noted that for certain establishments, as specified by the Central Government, the contribution rate is modified from "ten percent" to "twelve percent" as per notification in the Official Gazette.
Therefore, the section clearly states 10% (later modified to 12%) of basic, DA, and retaining allowance. The exclusion of DA from basic does not matter.
Furthermore, in all the court decisions you have referenced, you have missed those that have ruled contrary, indicating that PF should be calculated on full wages, including minimum wages. Notably, the 2011 decision of the Allahabad High Court led to the PF department releasing a circular stating PF is to be taken on full wages (later suspended on orders of the minister), and the Supreme Court has consolidated all appeals against this matter.
From India, Mumbai
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please note that the special allowance is covered under PF for deduction of PF.
From India, Thane
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From India, Thane
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Minimum Wage Rate and Its Components
The query is whether the minimum wage rate declared by the Government should be split into various components. The query is not about what constitutes basic wages for PF. The determination of basic wages for PF is a debatable subject and currently sub-judice. One of my friends simply copied and pasted information on what constitutes basic wages for PF from a judgment, which is not entirely relevant to this context.
The person inquiring is from Delhi, and based on the notification dated 03.03.2017, the minimum wage rate for unskilled labor is Rs. 13,350/-. She wishes to divide this minimum wage of Rs. 13,350 into Basic (Rs. 6,675), HRA (Rs. 3,338), and Special Allowance (Rs. 3,337).
Understanding the Minimum Rate of Wages
Firstly, let's understand what the minimum rate of wages comprises:
(i) Basic rate of wages and a special allowance known as the cost of living allowance;
(ii) Basic rate of wages with or without the cost of living allowance, and the cash value of any concessions such as supplies of essential commodities at concessional rates;
(iii) All-inclusive rates consisting of the Basic rate, cost of living allowance, and the cash value of any concessions if applicable.
If the minimum wage rate is already made up of the above components, then is there a need to split it into other components?
In my opinion, the inquirer should not include HRA in the minimum wage rate, and PF deductions should be made on the entire amount of Rs. 13,350/-.
From India, Mumbai
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The query is whether the minimum wage rate declared by the Government should be split into various components. The query is not about what constitutes basic wages for PF. The determination of basic wages for PF is a debatable subject and currently sub-judice. One of my friends simply copied and pasted information on what constitutes basic wages for PF from a judgment, which is not entirely relevant to this context.
The person inquiring is from Delhi, and based on the notification dated 03.03.2017, the minimum wage rate for unskilled labor is Rs. 13,350/-. She wishes to divide this minimum wage of Rs. 13,350 into Basic (Rs. 6,675), HRA (Rs. 3,338), and Special Allowance (Rs. 3,337).
Understanding the Minimum Rate of Wages
Firstly, let's understand what the minimum rate of wages comprises:
(i) Basic rate of wages and a special allowance known as the cost of living allowance;
(ii) Basic rate of wages with or without the cost of living allowance, and the cash value of any concessions such as supplies of essential commodities at concessional rates;
(iii) All-inclusive rates consisting of the Basic rate, cost of living allowance, and the cash value of any concessions if applicable.
If the minimum wage rate is already made up of the above components, then is there a need to split it into other components?
In my opinion, the inquirer should not include HRA in the minimum wage rate, and PF deductions should be made on the entire amount of Rs. 13,350/-.
From India, Mumbai
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Delhi Minimum Wages w.e.f. 01.10.2015.pdf