EPF deduction may increase, but not for everyone

• Employees earning more than Rs. 15,000 in basic wages plus dearness allowance will not be affected
• Only allowances that are variable and linked to the employee’s efforts, such as overtime allowance, can be excluded, the court said.

EPF deduction

According to the Employees’ Provident Fund (EPF) Act, 1952, 12% of an employee’s basic salary and dearness allowance has to be invested into EPF and the employer needs to invest an equal sum. For example, if your basic salary and dearness allowance add up to ₹12,000, your employer has to deduct ₹1,440 towards PF every month and match it with ₹1,440 from its own pocket. Both these amounts are, typically, a part of the cost to company (CTC).

If you earn more than ₹15,000 per month in basic salary plus dearness allowance, employers can limit the PF deduction to 12% of ₹15,000 ( ₹1,800) under the proviso to Para 26A of the Employees Provident Fund Scheme, 1952. This also brings down their matching contribution to 12% of ₹15,000. Many companies choose not to take the benefit of this proviso and contribute 12% of the actual basic salary plus dearness allowance, even if the sum is higher than ₹15,000.

Employers, however, often exclude special allowance, travel allowance or canteen allowance while computing PF deduction. For example, if your basic salary and dearness allowance add up to ₹30,000 and you get ₹10,000 as special allowance another ₹10,000 as conveyance allowance, your employer may only deduct 12% of ₹30,000 or ₹3,600. This keeps the “in-hand" salary high and reduces the CTC for the company.

The ruling

In Regional Provident Fund Commissioner (II) West Bengal vs Vivekananda Vidya Mandir and Others, the Supreme Court heard a batch of petitions from employees who had challenged the exclusion of a special allowance given as an incentive to teaching and non-teaching staff pursuant to an agreement between the employer and employees. This batch of petitions was clubbed with several other petitions in which allowances like house rent allowance (HRA), canteen allowance, travel allowance, management allowance, conveyance allowance, education allowance, medical allowance and others were excluded by different employers while deducting PF contributions.

The court ruled that allowances which are paid to all employees and are not variable or linked to any production incentive should not be excluded. Such allowances should be counted in the salary limit for PF deduction.

The impact

Experts have noted four implications of this ruling. First, the employees earning more than ₹15,000 in basic wages plus dearness allowance will not be affected. This is because employers of these types of workers are exempted from making PF contributions on amounts higher than ₹15,000 by the Proviso to Para 26A of the Employees’ Provident Fund Scheme, 1952.

Even employers who were voluntarily deducting PF contributions on wages above ₹15,000 per month would not be hit by the latest Supreme Court decision.

Second, HRA is excluded by the definition of basic wages under Section 2(b) of the EPF Act, 1952 and hence will not be affected by the judgment.

Third, employees earning basic wages plus dearness allowance less than ₹15,000 per month may have to contribute a higher share of their CTC to the EPF but this will depend on the facts of each case. The court has ruled that in each case the facts and evidence on record will have to be looked at in order to determine whether the allowance in question was truly variable and discretionary or it was fixed in nature.

Fourth, international workers posted in India may see a higher amount being deducted towards PF. Such workers are not exempted by the proviso exempting domestic workers earning more than ₹15,000 per month.