PF Registration

Supreme Court 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 the 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 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 the employer is divided into two parts, first is Employee Provident Fund (3.67%), and the other is the Employees’ Pension Scheme (8.33%).

Supreme Court Judgment on PF Contribution

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

The Supreme Court said that

“Whatever is payable by all concerns or earned by all permanent employees had to be included in basic wage for the purpose of deduction under section 6 of the act.”

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

On 28^th 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 the 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, the employer and the employee both have to make an equal contribution at the rate of 12 per cent 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 a 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 to 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;
• The 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

“In order that the amount goes beyond the basic wages, it has to be shown that the workman concerned had become eligible to get this extra amount beyond the normal work he was otherwise required to put in.“

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

Therefore Supreme Court Held that

“Allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution accordingly to the provident fund account of the employees”

How this Judgment on PF Contribution will affect you?

The Supreme Court judgment on PF contribution is reflecting a 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 order will be applicable to those with a basic salary and allowances up to Rs 15,000 as PF contribution. Beyond that, PF is not mandatory”

The Ending Road

A combined judgment has been passed by the apex court in the case of five civil lawsuits. The judgment ruled in favour of the Employee Provident Fund Authority[1]. 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 still not giving clearance on compulsory provident fund contributions by employees earning a basic salary of 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 a contribution to the provident fund or your contribution can be limited up to Rs 15,000/-.

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