New meaning of “Salary” for calculation of Employee’s Provident Fund (EPF)

I think it is common for all Govt organisations to open their eyes after hitting on their head by the way of court judgments. Latest to add them is recent circular of EPFO (Employee’s Provident Fund Organisation). Let us look at it’s effect on your monthly salary.

Till now it was common practice to calculate your EPF contribution based on your salary’s Basic+DA only (excluding allowances). Usually it was 12% of Basic+DA. But EPFO opened it’s eyes when Madras High Court and Madhya Pradesh High Court in two different judgments ruled that allowances like conveyance, education, food concession, medical, special holidays, night shift incentives, city compensatory allowance, etc., also be included in calculating salary for contribution to EPF. Based on these judgments, EPFO released the circular to rectify this anomaly.

Below is the November 30th 2012 circular regarding the above said issue.

“Basic wages by its own definition encompasses all the payments except the specified exclusions. All such allowances which are ordinarily, necessarily and uniformly paid to the employees are to be treated as part of the basic wages. The confusion in definition of wages (and hence the issue of splitting of wages) primarily arises from the expression commission or any other similar allowance payable to the employee” in Section 2(b) (ii) of the Act as “commission” and “any other similar allowance” are read as two separate expressions and hence “any other allowance” is read as an omnibus exclusion, thereby encouraging the subterfuge of splitting of wages to exclude the PF liabilities. The expression “commission or any other similar allowance payable to the employee” is one continuous term meaning commission or any other “commission” like allowance by whatever nomenclature referred. Thus “basic wages” is subject to exclusions expressly referred to in the above definition and no other.”  

Now let us look at EPF Act 1952 Section 2(b) ii

(b) “basic wages” means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include-
(i) the cash value of any food concession;
(ii) any dearness allowance that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living, house-rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;

Eventhough it looks from the recent circular that allowances need to be added to the salary to calculate contribution of EPF, but still exhaustive list of allowance not available. But from above circular we may conclude that from now onwards allowance also be part of salary for your contribution of EPF.

Take a look at it’s effect on your salary with one example. Suppose below are the few salary components then what is your current contribution and what will be your future contribution.

1) Basic-Rs.30,000 2) Conveyance Allowance-Rs.8,000 3) Medical Allowance-Rs.4,000 and 4) Night Shift Allowance-Rs.4,000 .

Previously as the meaning of salary was only Basic+DA, so 12% of Rs.30,000=Rs.3,600 was considered for EPF payout from your end and equally from your employer end too. But from now onwards it includes Basic+DA+Allowances. So your total salary from above example will be Rs.46,000. Contribution to EPF will be, 12% of Rs.46,000 which is Rs.5,520. More contribution of Rs.1,920, but less take home from now onward.

From above example you may see a cut in your take home pay. But indirectly you are  investing higher amount, which is good for your future. From tax part too you will get benefit as your contribution goes higher in new way of calculation. Also you may expect raise in CTC as your employer contribution to EPF will also raise. Hope it make sense to all expect employers :)

Latest Updation:- Due to pressure from few corners, EPFO temporarily withhold the above circular. Let us wait when they will again open their eyes.


Share & Comment


  1. Durgesh says

    Hi Sir,

    suppose my salary is 10000 than my pf will deduct or not and rs 6500 is it maximum amount we can get thru pf

    • says

      Durgesh-In that Rs.10,000 can you share me the components separately to understand it and explain you? Because now the mandatory limit for deduction of EPF raised from Rs.6,500 to Rs.15,000. So if your salary (Basic+DA) fall upto Rs.15,000 then you must have mandatory EPF deduction.

  2. Shalin Shah says

    Hi.I wanted to throw light on this question posted above : What is ceiling limit for EPF Wages? Is it Rs.6500/- or actual basic or whichever is more/less?
    Recently, I was made an offer by a company in which it was mentioned the ‘PF amount shall be 12% of basic or Rs.780/- whichever is less”
    Now, I am already getting PF in my current job as per the 12% ruling.From where does this Rs.780 clause come in?(12% of Rs.6500 comes to Rs.780).As far as I know a person can be excluded from PF is his/her earnings exceed 6500 rs per month.But I am already a part of the Provident Fund Scheme and would like to get the same 12% in my new job.
    So, is the company offering me the PF component right or they misintepreted the 6500 sentence in EPF law and offering me Rs.780 only?

    • says

      Shalin-Currently the salary meaning for EPF contribution is Basic+DA. But it is going to change shortly where in your other allowances will also include in it. Even I too unable to understand how they are calculating Rs.780. Your EPF inclusion will be based on the number of employees your company have but not on the minimum or the maximum EPF contribution like what you are thinking. So you need to ask your new employer like on what base they are claiming as EPF will be only Rs.780.

  3. Vinod says

    Overtime if paid on single rate then it is to be included to calculate the PF, if paid on double rate then there is no need to add for calcution of PF

    • Basavaraj Tonagatti says

      Vinod-Still clarity is missing and they are once again including allowance part to include in meaning of salary. So let us wait till clarity emerge :)

  4. Syed Shahzor says

    Hi Everybody
    I want to know the leave policies for private limited company,if possible please send your valuable comments related to leave policies applicable in Andhra pradesh.

    • BasuNivesh says

      Syed-Each organisation especially private organisations have their own policies. Hence it is difficult to say. Let me know what exactly you are looking for.

  5. Muthu says

    What is ceiling limit for EPF Wages? Is it Rs.6500/- or actual basic or whichever is more/less? please answer

    • BasuNivesh says

      Muthu-Employees drawing salary of Rs.6,500 or less have to compulsory make contribution. But whose salary is more than Rs.6,500 have no compulsion to join this scheme. So in this case basic will not come into picture. Salary means what it defined above.

      • Fatima says

        What is the present position of employers PF contribution to an employee, after the new rule that is all the allowances to be include in PF calculation


      • Srinivas says

        Are you saying that if an employee has a Salary of MORE THAN 6500, there is NO COMPULSION to join the Scheme. In other words, the Company need not include the said employee in the EPF Scheme?

  6. jk says

    sir if I want to withdraw amount from my EPF account for any personal requirement or any unexpected emergencies.
    can I withdraw.If yes then how the process?

    • BasuNivesh says

      JK-You can withdraw amount only for below mentioned emergencies. They are Marriage or Education (must have completed 7 years, available corpus is 50% of the balance and 3 times during the service), Medical Treatment, Purchase or Construction of house, repayment of housing loan, pre-retirement. For your education need you can apply in Form 31 through employer. A Bonafide certificate duly indicating the fees payable from the educational institution must be submitted as proof.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>