Is it legal to increase basic pay to 100% of gross pay and remove all other components for some employees?
For example, if an employee's salary is $15,000, can I split it into:
Basic - $10,000
DA - $5,000
And remove all other components like HRA, Conveyance allowance, etc.?
From India, Kottayam
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1For example, if an employee's salary is $15,000, can I split it into:
Basic - $10,000
DA - $5,000
And remove all other components like HRA, Conveyance allowance, etc.?
From India, Kottayam
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You haven't mentioned the status of your unit, the number of employees, or the relevant acts applicable to you.
Understanding Basic Pay and Allowances
Basic pay has its own significance for various purposes, as do DA, HRA, and Conveyance allowance. You have not mentioned the purpose behind this attempt. Referring to the Minimum Wages Act, there are stipulated rates for basics, DA, etc., for different categories of employment and sectors/employers. Units covered under this Act must at least maintain the minimum stipulated, with no limit for maximum. If these bifurcations are intended to reduce the burden of EPF and ESI contributions (which is not in order), it won't serve the purpose following the clear-cut judgment of the Supreme Court dated 28.2.2019, where most allowances are to be included in the calculation of PF contribution.
Impact of Carving Out DA from Basic Pay
Carving out DA from basic pay will have an impact if your DA is linked to revisions in DA arising from fluctuations in Price Indexes published by the Ministry of Labour from time to time. Similarly, defining HRA/Conveyance allowance (up to 2018-19) separately is beneficial and will help employees avail income tax relief to the extent permissible under the IT Act. This aspect should also be considered when you decide to proceed with the bifurcation.
From India, Bangalore
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Understanding Basic Pay and Allowances
Basic pay has its own significance for various purposes, as do DA, HRA, and Conveyance allowance. You have not mentioned the purpose behind this attempt. Referring to the Minimum Wages Act, there are stipulated rates for basics, DA, etc., for different categories of employment and sectors/employers. Units covered under this Act must at least maintain the minimum stipulated, with no limit for maximum. If these bifurcations are intended to reduce the burden of EPF and ESI contributions (which is not in order), it won't serve the purpose following the clear-cut judgment of the Supreme Court dated 28.2.2019, where most allowances are to be included in the calculation of PF contribution.
Impact of Carving Out DA from Basic Pay
Carving out DA from basic pay will have an impact if your DA is linked to revisions in DA arising from fluctuations in Price Indexes published by the Ministry of Labour from time to time. Similarly, defining HRA/Conveyance allowance (up to 2018-19) separately is beneficial and will help employees avail income tax relief to the extent permissible under the IT Act. This aspect should also be considered when you decide to proceed with the bifurcation.
From India, Bangalore
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Thank you for your response.
Our staff strength is only 15. I wanted to start PF for all employees, even though it is not mandatory for us. A few employees, whose gross pay is above 15000, prefer a higher take-home than contributing to PF. Their net taxable income is below the minimum IT slab, hence they inquired whether it is possible to remove the HRA component to bring their basic pay above the 15000 limit.
From India, Kottayam
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Our staff strength is only 15. I wanted to start PF for all employees, even though it is not mandatory for us. A few employees, whose gross pay is above 15000, prefer a higher take-home than contributing to PF. Their net taxable income is below the minimum IT slab, hence they inquired whether it is possible to remove the HRA component to bring their basic pay above the 15000 limit.
From India, Kottayam
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If the salary is above Rs. 15,000/-, there's no compulsion that employees should be subjected to EPF subscription, and hence their 'take-home (net) salary' could be higher. I strongly advocate that everyone should contribute to the EPF account, which is also tagged to EPS irrespective of whether or not it exceeds Rs. 15k. Also, the purpose of withdrawing HRA won't be necessary. I would request you to go through the recent judgment of the SC dated 28.2.2019, which has clarified what components of salary would account for EPF recovery (please see the attached document). Considering this, camouflaging in any name of allowance might not work.
Similarly, I would ask you to keep the pattern of salary as it is because HRA is an important aspect of the salary structure, and therefore any decision taken to remove this might pose problems when the taxable income of employees exceeds the limit in the future, affecting the tax planning of employees. If necessary, you may consider reducing the HRA percentage to 30% or so and also adjust the conveyance allowance, which has now been subsumed in 'Standard Deduction' reintroduced for 2018-19 and 19-20.
How about Mediclaim, Accident/Life Insurance policies, and pension contributions?
These assume greater importance nowadays. These are social benefit measures essential in times of need, though they might not directly impact the 'take-home pay.'
Thank you.
From India, Bangalore
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Similarly, I would ask you to keep the pattern of salary as it is because HRA is an important aspect of the salary structure, and therefore any decision taken to remove this might pose problems when the taxable income of employees exceeds the limit in the future, affecting the tax planning of employees. If necessary, you may consider reducing the HRA percentage to 30% or so and also adjust the conveyance allowance, which has now been subsumed in 'Standard Deduction' reintroduced for 2018-19 and 19-20.
How about Mediclaim, Accident/Life Insurance policies, and pension contributions?
These assume greater importance nowadays. These are social benefit measures essential in times of need, though they might not directly impact the 'take-home pay.'
Thank you.
From India, Bangalore
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If the salary is above Rs.15,000/-, there's no compulsion that they should be subjected to EPF subscription, and hence their 'take-home (net) salary' could be higher.
I did some more research online, but everywhere I am seeing that the PF wage (which excludes HRA) is used for determining whether PF enrollment is mandatory or not. The intention here is not to reduce the PF wage but to increase it so that PF wage is above 15k. Since the salary here is between 15,000 - 20,000, the tax benefit of HRA is not attractive for them.
[Link to resource: https://www.hinote.in/calculate-pf-on-gross-pay-and-not-basic-head-of-pay-part-i]
We already have group policies for Mediclaim and temporary disablement.
From India, Kottayam
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I did some more research online, but everywhere I am seeing that the PF wage (which excludes HRA) is used for determining whether PF enrollment is mandatory or not. The intention here is not to reduce the PF wage but to increase it so that PF wage is above 15k. Since the salary here is between 15,000 - 20,000, the tax benefit of HRA is not attractive for them.
[Link to resource: https://www.hinote.in/calculate-pf-on-gross-pay-and-not-basic-head-of-pay-part-i]
We already have group policies for Mediclaim and temporary disablement.
From India, Kottayam
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