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

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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.

 

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