PF deduction on special allowance-Is it true?

PF Deduction on Special Allowance-Rules Supreme Court

PF deduction on special allowance

PF Deduction on Special Allowance- Is it true?

The Supreme Court of India has passed an order on stating that for the purpose Provident Fund calculation basic wages must include ” Special Allowances“. A bench of Justices Arun Mishra and Naveen Sinha has ordered that employers can not avoid special allowances from basic wages for the purpose of PF deductions.

Therefore, the employers now required to make PF deduction on special allowance under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, along with the basic wages of an employee.

A bench comprising justices Arun Mishra and Navin Sinha dismissed the appeals filed by several companies challenging the decision of the Provident Fund Commissioner that they have to club basic pay with special allowances for deduction towards provident fund.

As per the order, an employer has to make PF contributions on Basic Salary+ Dearness Allowance+Special Allowances up to 15000 only. If it is more than ₹15000, PF contribution is not mandatory. 

As of now, employers were very much reluctant to include special allowance as part of the basic wages so as to avoid or reduce their PF contribution liability. But now the Apex Court has made it very much clear that employers can not segregate special allowances from the basic salary. This would definitely pinch the burden on the employers but at the same time would bring a big smile on the face of the employees whose basic salary including all other allowances are less than ₹15000 only.

Let’s take an example for better understanding

Say, the basic salary of Sri Ram Charan Mahapatra is 10,000 and DA is 4000 and Special Allowance is 900. What will be his monthly PF deduction?

Basic Salary        10000

DA                        4000

Special Allowance  900

Therefore, total wages for PF contribution is ₹14900. Thus his monthly PF contribution will be ₹1788(14900X12%). On the other hand, if his special allowance was 1500, his total salary would have been 15,500. In that case, employers have the option not to pay PF contribution since it has exceeded the ceiling of maximum basic of 15000.

Thus, the Apex Court’s ruling is not supposed to impact those earning a basic salary and special allowance above 15,000.

Is PF deduction on special allowance permissible?

If an employee’s Basic + DA + Special Allowance are less than 15,000 then it is mandatory for Provident Fund to be deducted from his salary. Other employees whose basic exceeds the threshold limit of 15000 can opt out by filling form 11 or can choose to have PF deducted on the ceiling of 15,000 which would be 1,800 monthly.

How much is the PF contribution?

The employees have to contribute 12% of the basic pay(Basic+DA+Special Allowance) to EPF, the employer contributes 8.33% towards the employee’s pension scheme and 3.67% to the EPF itself. Employers also make 12% matching contribution. Additionally, employers also pay 0.5% towards EDLI, 0.65% as EPF administrative charges and 0.01% as EDLI handling fee.

You may want to read the following:

Why the Supreme Court has to order this PF deduction on special allowance?

The court was hearing a bunch of appeals questioning whether the special allowances paid by an establishment to its employees would fall within the expression “basic wages” under Section 2(b)(ii) of Section 6 of the Act for computation of deduction towards Provident Fund.

Under Section 2 (b) of Section 6 of the Act basic wages refers to all emoluments earned by an employee in accordance with the terms of his/her employment contract but does not include the following:

i) The cash value of any food concession;

ii) Any dearness allowance, house rent allowance, overtime allowance, bonus, commission, or any other similar allowance payable to the employee;   

iii) Any presents made by the employer;

What did the Apex Court note in this regard?

The Apex Court has observed that Basic wages include Dearness Allowance at the time 12% PF calculation under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.

Therefore, those allowances which are variable in nature and are linked to the performance of an employee and which are not paid across all the employees on regular basis shall have to be excluded while deciding PF deduction on special allowance.

For Example Bonus, Overtime allowance, house rent allowance, medical allowance, incentives, performance related pay and etc. are to be excluded from the ambit of special allowance exclusively and should not be included in PF deduction on special allowance.

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