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Supreme Court Judgment on PF Contribution

Soniya Khanna

| Updated: Mar 04, 2019 | Category: PF Registration

SC Judgment on PF Contribution

The Employee Provident Fund (EPF) is a scheme which was introduced by the government to give financial security to the employees of establishments under Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. In India, the Employee Provident Fund (EPF) is regulated by the Employees’ Provident Fund Organization (EPFO). Under this, it is mandatory for all the employees whose income is up to Rs 15,000 per month to contribute 12% of the “basic salary and dearness allowance”. Besides this, it is also mandatory for employers to make an equal PF contribution of 12%. While the contribution made by employer is divided into two parts, first is Employee Provident Fund (3.67%) and other is Employees’ Pension Scheme (8.33%).

Now, for the purpose of calculation of Employee Provident Fund (EPF) contribution, the Supreme Court of India held that special allowances shall be covered under the “basic salary” of employees. The main contention of the Supreme Court is to deduct EPF (Employee Provident Fund) on the “amount including allowances” instead of basic salary.

Supreme Court Judgment on PF Contribution

The Supreme Court of India, held this judgment on 28th February, 2019.

The Supreme Court said that

Now, the special allowances will be taken into account for PF contribution under basic salary. Now, let’s get into the matter!

On 28th February 2019, the two-judge bench of Justices Arun Mishra and Navin Sinha passed a verdict that “under basic wages, special allowances will be considered such as conveyance, canteen, education, medical, special holidays etc and such other incentives”.

There are few exceptions in case employer is able to demonstrate that such an allowance is liable to deduction or if the allowance is linked to any incentive.

At present, as per the Employees’ Provident Funds (Amendment) Scheme, 2014, employer and the employee both has to make equal contribution at the rate of 12 percent of the ‘monthly pay’ which includes basic wages, dearness allowance, cash value of food concession and retaining allowance.

Impact of Supreme Court Judgment on PF Contribution

As per the Supreme Court judgment, segregation of ‘special allowance’ from basic wages cannot be done for the purpose of deduction of Provident Fund. This judgment will have great impact on the companies as well as on the salary class people.

Before vs. Now – What has changed?

As we know that as per Section 2(b) both employer & employee has to contribute 12% of the wages in Employee Provident Fund (EPF). While calculating the amount for PF contribution the term “basic wages” includes compensation earned by an employee as per the terms of the employment contract however following below mentioned will not be considered in basic wages:

  • Food concession value in cash;
  • Allowance payable to the employee such as dearness allowance, house rent allowance, overtime allowance, bonus, commission, etc;
  • Presents granted by the employer.

But now as per the latest judgment passed by the Supreme Court, for the purpose of calculation of PF, basic wages will include Dearness Allowance. The judgment order also focused on the non submission of proof by the establishments of the special allowances given to the employees as incentives.

The Supreme Court Held that

When the court questioned that no allowances have been paid to employees, there was no supporting material.

Therefore Supreme Court Held that

How this Judgment on PF Contribution will affect you?

The Supreme Court judgment on PF contribution is reflecting higher deduction for PF contribution which is a very good decision. But there is always a difference of opinion on every order. This decision might not go well with the current lifestyle of people as people will get less salary in hand. However it will not impact everybody.

The former central provident fund commissioner (CPFC) said to “The Times of India”

The Ending Road

A combined judgment has been passed by the apex court in case of five civil lawsuits. The judgment ruled in favor of the Employee Provident Fund Authority. This order has been passed considering the allowances which were forming a question that it should a part of the basic wage. However, this judgment is still not giving clearance on compulsory provident fund contribution by employees earning a basic salary up to Rs 15,000 at the time of joining a company. Therefore the contribution shall remain the same for the remaining tenure even if your basic wage increases after some time. Even if your salary is more than Rs. 15,000/- at the time of joining the establishment, you can opt not to make contribution to provident fund or contribution can be limit up to Rs 15,000/-.

You can read the detailed judgment from here: SupremeCourt Judgment on PF Contribution

Soniya Khanna

Legal Advisor at Enterslice I Areas of Expertise: FinTech & Corporate Advisory

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