Include special allowance with basic salary for computing EPF
By initiating a shift in Employee Provident Fund, Supreme Court has moved a wide financial correction on companies as well as take home salary of employees this year.
Justice Arun Mishra along with Justice Naveen Sinha passed the verdict in favour of Employee Provident Fund Organisation (EPFO) who pleaded and filed a case that companies were concealing and artificially lowering basic salaries and computing the EPF based on that basic pay. This ultimately reduced EPF contributions by the two parties involved that are employers and employees respectively.
This step will help employees save more money for their post retirement days but will impact their current lifestyle as the take home salary will get reduced. The judgment will impact companies economically and hence, many of them find this verdict unreasonable and an added cost.
Let me explain this further how it’s impacting financially on the two parties involved:
Till now the employee and employer were equally contributing in EPF funds, which is 12% each on basic salary. But after courts verdict this basic salary will also include your special allowance that may include dearness allowance, overtime, commission, bonus on business sourcing or any other allowance. And henceforth, 12% will be deducted on larger amount. So, it is believed that people’s take home salary will get reduced by 24% and will greatly impact their current lifestyle. Though this money eventually will be received in greater amount to the same employee at the time of their withdrawal.
ABHAY’S TOTAL SALARY – Rs. 25,000
If we break it into different categories:
Basic Salary – Rs.15,000
DA – Rs.1,500
House rent – Rs. 5,000
Special allowance – Rs. 3,500
So, uptill now the 12% PF used to get deducted only on basic salary but after court’s verdict, companies will deduct money on:
Basic salary + DA + special allowance
15,000 + 1,500 + 3,500 = Rs. 20,000
So, Abhay’s 12% PF will be deducted from Rs. 20,000.
What led EPFO to file a case in apex court was the question of whether special allowances paid by a company to its employees will fall within the manifestation ‘basic wages’ under Section 2(b)(ii) read with Section 6 of the PF Act for computation of deduction towards PF.
This was an outcome of a study done by EPFO where they found that firms were splitting employee pay packages into various small allowances making them pay less money in EPFO employee accounts. EPFO trustee Virjesh Upadhyay welcomes court verdicts and feels:
“this long pending issue has got its due and it states a new beginning for EPFO.”
This order will be applicable on people having a basic salary and allowance of upto Rs 15,000 a month. Beyond that, PF is not compulsory.
To say the least, the working class might take a little time to accept and get assimilated to this abrupt change in their payslips. The company’s payroll structures will get revised and this financial year they might feel hassled and confused.