Impact on PF Contribution Post Supreme Court's Verdict
The Supreme Court's decision, delivered by Justices Arun Mishra and Naveen Sinha, mandates that PF contributions will now include all allowances paid to an employee, not just the basic salary. The ruling specifies that 'special allowance' must be included in the basic pay for calculating provident fund (PF) deductions from both employees and the company.
A bench of Justices Arun Mishra and Naveen Sinha dismissed appeals from several companies challenging the Provident Fund Commissioner's decision to combine basic pay with special allowances for PF deduction and employer matching contributions. Other emoluments, such as house rent allowance and special allowance, are part of the total salary or cost to the company and should be considered for PF contribution calculations.
Allowances Considered as Basic Wages
Allowances that do not meet the following criteria will be considered basic wages for PF charges:
- Points Discussed by the Hon'ble Supreme Court
1. The Act is a social welfare legislation aimed at protecting weaker sections of society, i.e., workmen, and should be interpreted to serve and advance its purpose.
2. Under Section 6 of the Act, the appellant must pay contributions on basic wages, dearness allowance, and retaining allowance (if any).
3. To exclude any incentive wage from basic wage, it must have a direct nexus and linkage with extra output.
4. Inclusions: All amounts payable by all concerns or earned by all permanent employees must be included in the basic wage for deductions under Section 6 of the Act.
5. Exclusions: Only allowances not payable by all concerns or not earned by all employees are excluded from deductions. Earnings beyond the base standard, like production bonuses or incentive wages, fall outside basic wage under Section 2(b) of the Act.
6. The special allowance in question was part of the salary breakup payable to all employees and had no nexus with extra output, thus falling within the definition of "basic wage." Dearness allowance is payable in all concerns, either as an addition to basic wage or as part of consolidated wages. Retaining allowance is payable to all permanent employees in seasonal factories and included in Section 6. However, house rent allowance is not universally paid and is excluded from basic wage. Similarly, overtime allowance, though in force in all concerns, is not earned by all employees and is excluded from basic wage.
7. Attendance incentives, not contractually enforceable, do not fall within basic wage as they are not paid to all employees. Transport/conveyance allowance, similar to house rent allowance, is a reimbursement and not universally paid, thus excluded from basic wage. Conveyance allowance paid without proof is unsustainable.
8. Special incentives or production bonuses for extra output have a direct nexus with output and are not basic wages. This incentive wage falls outside basic wage.
9. Variable earnings, varying by individual efficiency and diligence, are excluded from "basic wages."
Note:
1. The Supreme Court has issued judgments on respective appeals. Orders/circulars confirming implementation are expected from various RPFCs. Until then, the above parameters should be used to check existing pay structures.
2. The wage ceiling of ₹15,000 per month remains unchanged.
3. PF contribution at 12% of Basic Wages up to ₹15,000 is the minimum mandatory contribution. Even if all allowances are considered under Basic Wages, the minimum mandatory PF contribution is capped at ₹15,000 unless amended by EPFO Authorities.
Date: 05 March 2019
Ms. Amruta Magar
Manager Legal
M: [Phone Number Removed For Privacy-Reasons] / [Phone Number Removed For Privacy-Reasons]
From India, Pune
Acknowledge(1)
Amend(0)
11The Supreme Court's decision, delivered by Justices Arun Mishra and Naveen Sinha, mandates that PF contributions will now include all allowances paid to an employee, not just the basic salary. The ruling specifies that 'special allowance' must be included in the basic pay for calculating provident fund (PF) deductions from both employees and the company.
A bench of Justices Arun Mishra and Naveen Sinha dismissed appeals from several companies challenging the Provident Fund Commissioner's decision to combine basic pay with special allowances for PF deduction and employer matching contributions. Other emoluments, such as house rent allowance and special allowance, are part of the total salary or cost to the company and should be considered for PF contribution calculations.
Allowances Considered as Basic Wages
Allowances that do not meet the following criteria will be considered basic wages for PF charges:
- Points Discussed by the Hon'ble Supreme Court
1. The Act is a social welfare legislation aimed at protecting weaker sections of society, i.e., workmen, and should be interpreted to serve and advance its purpose.
2. Under Section 6 of the Act, the appellant must pay contributions on basic wages, dearness allowance, and retaining allowance (if any).
3. To exclude any incentive wage from basic wage, it must have a direct nexus and linkage with extra output.
4. Inclusions: All amounts payable by all concerns or earned by all permanent employees must be included in the basic wage for deductions under Section 6 of the Act.
5. Exclusions: Only allowances not payable by all concerns or not earned by all employees are excluded from deductions. Earnings beyond the base standard, like production bonuses or incentive wages, fall outside basic wage under Section 2(b) of the Act.
6. The special allowance in question was part of the salary breakup payable to all employees and had no nexus with extra output, thus falling within the definition of "basic wage." Dearness allowance is payable in all concerns, either as an addition to basic wage or as part of consolidated wages. Retaining allowance is payable to all permanent employees in seasonal factories and included in Section 6. However, house rent allowance is not universally paid and is excluded from basic wage. Similarly, overtime allowance, though in force in all concerns, is not earned by all employees and is excluded from basic wage.
7. Attendance incentives, not contractually enforceable, do not fall within basic wage as they are not paid to all employees. Transport/conveyance allowance, similar to house rent allowance, is a reimbursement and not universally paid, thus excluded from basic wage. Conveyance allowance paid without proof is unsustainable.
8. Special incentives or production bonuses for extra output have a direct nexus with output and are not basic wages. This incentive wage falls outside basic wage.
9. Variable earnings, varying by individual efficiency and diligence, are excluded from "basic wages."
Note:
1. The Supreme Court has issued judgments on respective appeals. Orders/circulars confirming implementation are expected from various RPFCs. Until then, the above parameters should be used to check existing pay structures.
2. The wage ceiling of ₹15,000 per month remains unchanged.
3. PF contribution at 12% of Basic Wages up to ₹15,000 is the minimum mandatory contribution. Even if all allowances are considered under Basic Wages, the minimum mandatory PF contribution is capped at ₹15,000 unless amended by EPFO Authorities.
Date: 05 March 2019
Ms. Amruta Magar
Manager Legal
M: [Phone Number Removed For Privacy-Reasons] / [Phone Number Removed For Privacy-Reasons]
From India, Pune
Acknowledge(1)Amend(0)
1. Supreme Court has given the judgment at respective appeals. Orders/circulars confirming the implementation are expected from various RPFCs. Until then, the above parameters are to be used to check the existing pay structure.
2. Wage ceiling of ₹15,000 per month is not revised.
3. PF Contribution at the rate of 12% of Basic Wages up to ₹15,000 is the minimum mandatory required contribution. Even if considering all allowances under Basic Wages, the minimum mandatory required PF contribution is capped at ₹15,000 unless and until there are no orders from EPFO Authorities amending the PF wage ceiling.
3. To exclude any incentive wage from basic wage, it should have a direct nexus and linkage with the amount of extra output.
4. Inclusions: Whatever is payable by all concerns or earned by all permanent employees had to be included in basic wage for the purpose of deduction under Section 6 of the Act.
5. Exclusions: It is only such allowances not payable by all concerns or may not be earned by all employees of the concern that would stand excluded from deduction. It is only when a worker produces beyond the base standard, what he earns would not be a basic wage but a production bonus or incentive wage which would then fall outside the purview of basic wage under Section 2(b) of the Act.
From India, Pune
Acknowledge(0)Amend(0)
2. Wage ceiling of ₹15,000 per month is not revised.
3. PF Contribution at the rate of 12% of Basic Wages up to ₹15,000 is the minimum mandatory required contribution. Even if considering all allowances under Basic Wages, the minimum mandatory required PF contribution is capped at ₹15,000 unless and until there are no orders from EPFO Authorities amending the PF wage ceiling.
3. To exclude any incentive wage from basic wage, it should have a direct nexus and linkage with the amount of extra output.
4. Inclusions: Whatever is payable by all concerns or earned by all permanent employees had to be included in basic wage for the purpose of deduction under Section 6 of the Act.
5. Exclusions: It is only such allowances not payable by all concerns or may not be earned by all employees of the concern that would stand excluded from deduction. It is only when a worker produces beyond the base standard, what he earns would not be a basic wage but a production bonus or incentive wage which would then fall outside the purview of basic wage under Section 2(b) of the Act.
From India, Pune
Acknowledge(0)Amend(0)CiteHR is an AI-augmented HR knowledge and collaboration platform, enabling HR professionals to solve real-world challenges, validate decisions, and stay ahead through collective intelligence and machine-enhanced guidance. Join Our Platform.
Recent Judgment of Honble Supreme Court on Wage eligible for contribution.pp tx
Definition - PF Basic Wages - Supreme Court - Brief.pdf