INTRODUCTION:
The Employee Provident Fund Scheme (“the EPF Scheme”) is the main scheme under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and covers every establishment in which 20 or more persons are employed. However, certain organisations are covered, even if they employ less than 20 persons each.
Once the establishment gets covered under the scheme, the deduction of provident fund shall be mandatory to employees of the establishment based on fulfilment of certain conditions. As per the provisions of the scheme, employees drawing less than Rs. 15,000/- p.m. have to mandatorily become members of the EPF. Employees whose ‘pay’ is more than Rs. 15,000/- p.m. at the time of joining is can voluntarily opt for deduction and contribution to EPF if both employee and employer agree. The primary purpose of EPF scheme is to provide for compulsory savings especially among low-income earners so as to ensure availability of contingency funds to them.
The contribution payable by the employer and employee shall be 12% of basic wages plus dearness allowance plus retaining allowance. The definition of “basic wage” explicitly excludes cash value of food concessions, dearness allowance, house-rent allowance, overtime allowance, bonus, commission, presents made by the employer. The recent judgment of Hon’ble Supreme Court of India clarifies what qualifies as “basic wage”.
SUPREME COURT RULING:
The recent judgement made by the Apex Court in case of The Regional Provident Fund Commissioner (II) West Bengal v. Vivekananda Vidyamandir and Others clarified the issue of the allowances to be excluded while calculating provident fund contribution. The court analysed the issued and concluded that, “The test adopted to determine if any payment was to be excluded from basic wage is that the payment under the scheme must have a direct access and linkage to the payment of such special allowance as not being common to all. The crucial test is one of universality. The Apex Court further clarified that the amounts, whether classified as “allowances” or not, if paid equally across the board to all employees, would be considered as “basic wage” for the purpose of calculation of PF contribution. Thus, Supreme Court concurred with the regional PF commissioners, who had concluded in each of the instances concerned, that the allowances were essentially part of basic wages and had been camouflaged as part of an allowance to avoid deduction of PF contribution.
IMPACT OF RULING:
The said decision will have far-reaching impact as follows:
- Monthly EPF calculations will have to be revised, accordingly calculation of CTC will be revised.
- The contribution towards EPF will be on a higher amount and hence less take-home pay for the employee.
- The retirement kitty will see more inflows as higher monthly PF contribution will move into the employee’s PF account.
- The EPFO and ultimately Government will have more funds at their disposal for investing it in various sectors of economy.
The point of consideration here should be the number of employees falling out of the ambit of the Scheme if allowances are to be included while calculating Rs. 15,000/- p.m., since applicability of deduction is directly linked with the basic wages unless and until both employee and employer both agree to contribute voluntarily.
Disclaimer: This article is for the purpose of general awareness and does not represent professional opinion of the author.