% of basic for PF purpose and salary limit for employer for PF contribution

Dear Members,

The statutory limit of salary to mandatorily become a PF member is Rs. 15,000 (if he is not already a member). Can you please guide? Do not consider international workers. If the attached circular is still valid, does the employer have the right to limit his contribution to Rs. 15,000 only, irrespective of the employee's contribution? Please confirm.

I have recently come to know that PF authorities and PF consultants are suggesting that the basic salary should be at least 50% of the gross salary. Does this apply to an employee with a gross salary of Rs. 100,000 and a basic salary of Rs. 50,000? Or is this 50% (basic of gross) clause only for employees whose gross salary is Rs. 15,000 or less? Please share your experience in this regard.

Regards,
Puran Dangwal

Dear Puran,

As far as I comprehend your post, the PF ceiling limit and limiting basic pay are two separate points. Basic pay is limited to 40% or a maximum of 50% of the total CTC. This gives an advantage to employees when claiming HRA exemptions and also allows them to raise their PF contribution above the ceiling limit. PF deductions, whether to be done on the ceiling limit or actual basic pay, are mostly mutually agreed upon between organizations and employees. However, an organization ends up paying higher administrative charges on PF if the deduction is based on actual basic pay rather than the ceiling limit.

For employees earning a gross of 15,000 or less, the general practice is to adjust the basic pay as per the applicable Minimum Wages.

Hope this helps.

Regards,
Rahul Chhabra

Dear Mr. Chhabra,

Thank you for taking the time to reply. I would like to restate my query.

Some PF authorities and PF consultants suggest that the basic pay should not be less than 50% of the Gross salary. Is this true even if the basic salary exceeds 15,000? Is there any official documentation to support this viewpoint from the PF department? If my gross salary is Rs. 60,000 and my basic salary is 18,000, could the PF authority question my employer regarding the disparity (basic salary being less than 50% of Gross), or would they not inquire since my basic is above the basic PF ceiling of 15,000, albeit less than 50% of Gross?

Furthermore, according to the circular I have already attached, an employer can cap their contribution to the PF ceiling salary, which stands at Rs. 15,000. Does this imply that if my basic salary is Rs. 18,000 (Gross 60,000), I can contribute based on the full basic amount, i.e., 12% of 18,000, while my employer is restricted to contributing on Rs. 15,000 only?

If this is the case, what is the rationale behind the equivalent contribution by the employer? I presume this occurs when both the employee's and employer's contributions are capped at 12% of Rs. 15,000.

Regards,
Puran

Dear Puran,

PF authorities have not laid down any guidelines on the percentage of basic pay vis-a-vis total compensation. They have defined the ceiling limit for PF contributions. Although basic pay not only determines PF contributions but also impacts HRA exemptions, Leave Encashment, Gratuity, etc. Therefore, a lower basic pay reduces the CTC, tax exemptions, and other benefits of an employee. In my experience, the PF authority will not question if your contribution is at the ceiling limit or higher; however, they will inquire if your PF contribution is decreased from the actual basic to the ceiling limit in a particular financial year.

The circular you mentioned is missing. Both the employee and employer have to contribute their share of PF based on the same basic wage. If an employee wishes to contribute more, they can opt for Voluntary PF.

Hope this information is helpful.

Regards,
Rahul

Dear Mr. Rahul,

Thank you.

Regards,
Puran

Dear Mr Puran,
Rightly said by Mr Chhabra, the PF authorities have nothing to do with Basic Wages. But as per my practical experience the PF Officials (Enforcement Officer) forces that PF contribution should be deposited as per the MW Act of the appropriate govt.). The Basic wages should not be less than the MW Act.
But if we check the Wages definition under the Act, it says contribution should be paid on gross salary (except HRA). In general we have accepted the PF Wages as Basic Wages of the CTC.
Now come to your second point what should be the PF Wages in case the Basic (being 50% or so) Wages is more than 15k. I would like to say the employer can restrict the PF wage ceiling on Rs. 15000 (for both shares). However, if the employee want to contribute at a higher rate than he can opt for VPF (as already explained by Mr Chhabra).
Pls find attached an article wherein some important court judgement referred and the author has explained his view in general language (Refer to Page 4). Though merely the article can’t be treated as valid document for framing any rule, but if you able to drag out the court judgement that can produced as legal doc.
Hope the above will serve the purpose.

Sir,

Thanks for your input. Is it fair that for a gross salary of Rs. 1 Lac, the basic salary is 15k in the salary structure?

In the above case, if we keep the basic at 50K (without reducing other related benefits like Gratuity, leave salary) but restrict PF contribution to Rs. 15K, can we do so? I am of the opinion that we should inform the dealing agent at RPFC in advance in writing if we make this change.

Your thoughts?

Regards,
Puran

Dear Mr Puran,
There could be two scenario:-
1 Minimum Compliance as laid down in the Act/Law.
2 There is no bar for maximum employee welfare. That all depends upon establishemtn strategic approach towards employee welfare, profitability, budget etc.
What I suggested is acceptable as per law, if you want to deduct and deposit PF on higher salary than you can do it. Moreover, in the CTC concept, the employer PF also included in CTC. So you can deduct PF on higher wages as well.
I think we don’t need to inform to RPFC in advance. In case any member join on Basic Wages more than 15k and don’t want to make PF deduction, than we need to fill some form and needed employee consent for non PF Deduction.
Senior member can throw more light on the matter.

Dear Puran,

EPFO has given the option to deduct PF at actual basic or ceiling limit if actual basic is higher than the ceiling limit. Thus, yes, one can have an actual basic pay of Rs. 50,000 but can be contributing to PF at the rate of the ceiling limit. There is no need to inform the EPFO unless you are decreasing the PF contribution from actual basic to the ceiling limit, but not in the case of vice versa.

Regards,
Rahul

Dear Sir,

Attached, please find the Supreme Court judgment on Basic wages for PF Contribution on 28 Feb 19. How can we define the basic wages for calculations of PF? What is the limit of HRA in connection with basic wages? What is your opinion on the Supreme Court judgment?

Dear friends,

There is no act stipulating what should be the basic pay and what the other allowances should be, except in the case of minimum wages and wage revisions notified by the central government and state governments category-wise/industry-wise from time to time. However, this doesn't mean the basic pay should be greater than or less than other allowances. For example, if you study the pattern followed by pay commissions (central and state), banks, etc., FDA/VDA used to be more than double the basic pay. This phenomenon undergoes changes as and when FDA/VDA is merged/absorbed into basic pay during wage settlement agreements, raising it, and VDA is linked to the price index published periodically for further revision, either quarterly or half-yearly.

Now, the Supreme Court in its judgment dated 28.2.19, attached in the previous posts, clearly defined how various allowances should be reckoned for the purposes of recovery towards EPF. This judgment has settled all doubts regarding whether or not certain allowances should be included or excluded for EPF calculations. The impact of the judgment obviously adds to the financial outgo of employers, and employees' EPF accounts get a boost, resulting in some having a lighter take-home pay. I don't think the judgment could be disputed, sidetracked, or ignored in any way. The financial strain on employers, however big or small, notwithstanding, the judgment is a welcome measure as it has settled all disputes and interpretations, providing the long-awaited clarity.

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I have corrected the spelling, grammar, and punctuation errors in the text while maintaining the original meaning and tone. I have also ensured proper paragraph formatting with a single line break between paragraphs.

Dear Sirs,

Recently, the Cement Wage Board has been settled between CMA and trade unions before the Chief Labour Commissioner in New Delhi, which is effective from 1.4.2018. Arrears and two service weightage increments are currently under preparation. However, the plant-level union has submitted a letter demanding the management to pay differential holiday wages and differential leave encashment from 1.4.2018. Is the demand justified, and is the employer required to pay this? Please clarify.

Aman/Kadapa

Dear Aman,

It's clearly understood that when a wage settlement is reached 'with retrospective effect' and received authentication by authorities, it's without doubt that all relevant past emoluments will be impacted, such as OT/holiday wages, leave encashment, EPF, bonus, etc., which were paid at pre-revised wages for the period from 1.4.18 till date. Accordingly, differences have to be re-worked and disbursed. This can be avoided only if the parties to the agreement specifically agree to forego arrears, meaning 'effective from the prospective date' only. The demand of the union deserves on merit to arrears, and employers have to rework the same and disburse.

Dear Sirs,

Can we give HRA more than 40% or 50% of basic? Commission is a salary component. When can we use this?

Please reply.

Regards,
Sandeep

It is reasonable that HRA is limited to around 30% of the basic salary. This is again dependent on the amount of basic salary itself. One can easily justify HRA being considered even greater than 30% in a country where urbanization is fast catching up and the cost of living is constantly increasing. Not to mention cities like Delhi, Mumbai, Chennai, Kolkata, and others, where no amount of HRA would suffice. However, one should be aware of the implications of income tax on HRA received versus HR paid. HRA received over and above the exempted limits is subject to income tax as per the formula under the Income Tax Act.

Commission as a salary component is typically considered for those in marketing, sales, and business development roles. Job descriptions for these positions usually involve employees being driven by targets. This commission, often a fixed sum at a minimum, used to be paid monthly as part of the salary, with any achievement exceeding benchmarks rewarded as commission or bonus calculated based on a specific formula. The amount may not be fixed for everyone every month and is bound to vary based on company policies.

For employees involved in processing and production-related roles, they are often paid production incentives or incentive bonuses. It is possible for these employees to become eligible for these payments either continuously on a monthly basis or intermittently.

Dear Team,

I would like to know whether washing allowance can be taken into consideration while calculating PF.

Good to know. All these above points are well taken. In my view, once you deduct the PF & ESI on a basic wage, it can't be reduced later on just to lower the PF contribution.

Yes, Chandan. Except when a reduction in salary results in a consequent reduction in PF & ESI, it may be possible if and when the incumbent's salary is decreased due to penal action awarded as a 'punishment' for any disciplinary action taken by the appropriate authority. However, no reduction is possible solely to lower PF & ESI contributions.

Hi Raghav,
Regarding the 'Washing Allowance' for PF calculation, please refer to the relevant issue in this link - https://taxguru.in/corporate-law/pf-...pt-hra-sc.html. A copy of the judgment is attached.

Hi,

Could anyone please provide the Circular/Notification/Gazette from the PF department regarding PF deduction on other allowances except HRA, OT, etc., in response to the Supreme Court order dated 28th Feb 2019?