Impact of SC Ruling on Allowance to be included in wages for PF Contribution
In an interesting case, the Supreme Court has ruled that PF contributions have to include any allowances paid to the employees over the basic salary.
The key issue in front of the top court was whether the special allowances paid by an establishment to its employees would fall within the expression “basic wages” under Section 2(b)(ii)<link> read with Section 6 of the Act for computation of deduction towards Provident Fund.
You can access the ruling here.
The SC finally has asserted: “Where the wage is universally, necessarily and ordinarily paid to all across board, such emoluments are basic wages. And where the payment is specially paid only to those who avail of the opportunity is not basic wages.”
A case in point is the overtime allowance. Though it is generally in force in all concerns, is not earned by all employees and thus it is excluded from basic wages. Hence, any payment by way of special incentive for work is not basic wages.
Since, there was plenty of room for misinterpretation, the Supreme Court in its observation has said that all allowances other than HRA and incentives attract PF contribution. There are, however, certain caveats to this.
Who is impacted?
This ruling impact only those domestic workers with basic salary less than Rs 15,000 per month as per para 26A and para 2(f) of the EPF Scheme. An additional check here is that, the employer should be making PF contribution on full basic salary or on minimum Rs 15,000 per month.
By the virtue of this observation, it is implied that international workers as per para 26A of the PF Scheme will not be impacted by this ruling.
For managements, the implications are a choice between paying PF contribution on all the components of the salary/wages up to the limit of Rs 15,000 except HRA or to restructure the salary components.
Since there is no standard for prescribing minimum basic salary/wages by state governments, employers will have to carefully restructure their salary/wages.
It should be noted that for Employees, the cost of PF contribution will increase which in turn decreases their take home salary. Both employers and employees should note that the judgement leads to retrospective compliance. It is important to understand components which attract and/or outside coverage of PF contribution.
In summary, though the Supreme Court judgment does not discuss splitting of salary, it has clearly ruled out breaking the basic salary into various allowances. Also, if the basic salary is Rs 15,000 and above the judgment will not have any effect.
You can speak to our Payroll management specialists to see if your salary structure requires changes.