The Supreme Court of India, on Feb 28th, 2019 passed an important judgement on the definition of 'basic wages' for the purposes of calculating Provident Fund contributions. This is a very important ruling as it impacts the cost to companies and take home of employees.
We present a simplified version of the summary of the ruling.
- PF contribution is on all amounts paid to employees, except on certain amounts ( listed below). PF is payable on Special Allowance as well.
- PF is not payable on House Rent Allowance (HRA)
- PF is not payable on any allowance which is variable in nature like Overtime Allowance, Bonus, Commission
To summarize, PF is payable on Gross Salary reduced by HRA and any variable amounts.
Certain other points to be noted
- There is no effective date specified by the PF Department for this change, however it is strongly recommended that the changes be done from March 2019 itself. ( Since the Supreme Court only looked upon the definition of basic wages and upheld the PF Department’s interpretation, technically a Notification is not needed for the change to take effect)
- This Ruling has not touched upon the impact of those contributing PF on amounts exceeding Rs 15,000 per month which is the statutory wage limit. Hence, this will not impact PF contributions on sums exceeding Rs 15,000 per month.
- This Ruling impacts companies employing foreign nationals qualifying to be International Workers (i.e. other than Indian passport holders) where the statutory wage ceiling of Rs 15,000 per month does not apply.
- Currently, there is no clarity on whether this will have any retrospective effect on companies contributing PF on amounts lesser than Rs 15,000 per month
Some examples to clarify the new working
Scenario | Example ( Rs per month) | PF Computation
| |||||||||||
In case Gross Salary is less than Rs 15,000 per month |
| PF is now payable on Gross Salary minus HRA, OT, Bonus and other variable amounts. Old PF contribution – 10,000*12% = Rs 1,200 New PF contribution – 12,000*12% = Rs 1,440
| |||||||||||
In case Gross Salary is more than Rs 15,000 per month, but Basic is less than Rs 15,000 per month ( example 1) | Basic | Rs 10,000 | PF is now payable on Gross Salary minus HRA, OT, Bonus and other variable amounts. Old PF contribution – 10,000*12% = Rs 1,200 New PF contribution – 14,000*12% = Rs 1,680 | ||||||||||
HRA | Rs 2,000 | ||||||||||||
Special Allowance | Rs 4,000 | ||||||||||||
Overtime | Rs 400 | ||||||||||||
Gross | Rs 16,400 | ||||||||||||
In case Gross Salary is more than Rs 15,000 per month, but Basic is less than Rs 15,000 per month ( example 2, where Statutory Wage Limit becomes applicable) |
| PF is now payable on Gross Salary minus HRA, OT, Bonus and other variable amounts. Old PF contribution – 12,000*12% = Rs 1,440 New PF contribution – 15,000*12% = Rs 1,800 | |||||||||||
Gross Salary is more than Rs 15,000 per month and Basic is also more than Rs 15,000 per month and you currently contribute PF on restricted wages |
| Old PF contribution – 15,000*12% = Rs 1,800 New PF contribution – 15,000*12% = Rs 1,800 No change | |||||||||||
Gross Salary is more than Rs 15,000 per month and Basic is also more than Rs 15,000 per month and you contribute PF on actual Basic |
| Old PF contribution – 20,000*12% = Rs 2,400 New PF contribution – 20,000*12% = Rs 2,400 No change | |||||||||||
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