Recently the Supreme Court Of India has delivered a landmark decision on the allowances which need to be taken into account while determining the contribution under the Employee Provident Fund Scheme, which lucidly burden the employees of the private sector. Refer the implications of the landmark decision.
Legal credibility of the Existing EPF scheme
An employer have to deduct 12% of Basic Salary and dearness allowance as part of employees' contribution towards the Employee Provident Fund (EPF) with an addition of same amount as part of Employer Contribution.
EPF is mandatory to all employees drawing less than Rs 15,000 monthly take home salary. For threshold limit of Rs 15,000, basic pay and dearness allowances are only considered. The employees drawing more than Ra:15,000 monthly take home salary have an option to opt out from the scheme at the time of joining to the establishment. Once you joined to the scheme it lasts till you have discontinued your service from the employer.
Perhaps it is very much evident if your monthly take home exceeds Rs:15,000 and opted for the EPF scheme, then the employer will add up both the contributions (employee and employer contribution towards EPF) in your CTC else he will contribute @ 12 per cent on the base amount of Rs 15,000.
What the Supreme Court decision says?
There is no dispute as regards the basic salary but amount of allowances paid by the employer have always been subject matter of litigation between the employers and the PF authorities. The matter seems to have been set to rest by a Supreme Court decision delivered on February 28, 2019. The Supreme Court while dealing with various petitions and appeals filed before it, considered the legal provisions, the purpose of the legislation on PF. It also considered some of its earlier decisions. It then laid down the “rule of universality” to the allowances to be considered for PF deduction. If an allowance is universally paid by various employers or is paid to all the employees of an establishment without any reference to the quantum of efforts put in by the employee or the quantum of the output, the allowance is to be considered as part of salary/dearness allowance and needs to be included for the purpose of PF deduction. So overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or work done in such employment shall stand excluded. Likewise, any allowance which may vary between individuals according to their efficiency and diligence will stand excluded from the term “basic wages” for this purpose.
The court held that any allowance which are essentially a part of the basic wage but camouflaged as an allowance to avoid deduction and contribution has to be treated as basic salary or dearness allowance for the purpose of PF deduction and contribution.
Implication of the decision
The decision will have wider implications depending on individual situation. For those employed in lower scale of emoluments where amount considered for PF contribution is lower than Rs 15,000 and who receive such universal allowance, not linked to efficiently, will get lower “in hand salary” as the employer is bound to take into account such allowances while deducting PF deduction. The employer also will have to shell out more money in the form of employer’s contribution. Such employees will be able to accumulate larger corpus in their provident fund account at the time of their retirement.
For employees receiving higher salary with allowances but contributing on threshold limit will not be affected by this Supreme Court decision. However, for employees in higher salary bracket, whose contribution is computed with reference to such higher amount of salary, the contribution toward provident fund will go up if they are in receipt of such allowance not considered hitherto for PF contribution.
So in case your Cost to the Company (CTC) includes the employer’s contribution the amount of contribution is going to go up due to Supreme Court decision as discussed, your in hand will reduce substantially due to increase in deduction from your salary as well as your salary coming down to make for increased quantum of employer’s contribution.
