Simplified Analysis of the Supreme Court ruling on Basic Wages for Provident Fund Computation.
The Honorable Supreme Court of India have passed a Judgment on 28th February, 2019 in case of Regional Provident Fund Commissioner (II), West Bengal v. Vivekananda Vidyamandir & Others. [Civil Appeal No 6221 of 2011]. A bench of Justice Shri Arun Mishra and Justice Shri Naveen Sinha ruled that employers cannot segregate ‘special allowance’ from basic wages for purpose of PF deductions.
It’s a judgment on the definition of ‘basic wages’ for the purposes of calculating Provident Fund contributions. This is a very important judgment as it impacts on cost to companies (Employers) and take home salary of employees.
1. PF contribution is payable on all amounts paid to employees, except on certain amounts. PF is payable on Dearness Allowance.
2. PF is not payable on House Rent Allowance (HRA).
3. PF is not payable on any allowance which is variable and not universal in nature like Overtime, Statutory Bonus, Commission, Incentive, Leave Encashment, etc.
To Conclude, PF is payable on Gross Salary, reduced by HRA and any variable allowance.
Certain other points to be considered:
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There is no effective date specified by the PF Department for application of rulings in the Judgment.
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This Ruling has not touched upon the impact of those contributing PF on amounts exceeding ₹ 15,000/- per month which is the statutory wage
limit. -
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 ₹ 15,000/- per month does not apply.
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Currently, there is no clarity on whether this will have any retrospective effect on companies contributing PF on amounts lesser than ₹ 15,000/- per month.
Some Examples for the Calculation of Salary after the SC Judgment:
| Case | Calculation | PF Computation | ||||||||||
| Example No.: 1
In case when Gross Salary is less than ₹ 15,000/- Per Month. |
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PF is now payable on Gross Salary minus OT, HRA, Statutory Bonus and other variable allowances.
Old PF Contribution – New PF Contribution – 12000+1500=13500, |
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| Example No.: 2
In case when Gross Salary is more than ₹ 15,000/- Per Month, but Basic is less than ₹ 15,000 per month (Example 1). |
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PF is now payable on Gross Salary minus OT, HRA, Statutory Bonus and other variable allowances.
Old PF Contribution – New PF Contribution – 13000+1800=14800, |
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| Example No.: 3
In case when Gross Salary is more than ₹ 15,000/- Per Month, but Basic is less than ₹ 15,000 per month (Example 2, Where Statutory Wage limit becomes applicable). |
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PF is now payable on Gross Salary minus OT, HRA, Statutory Bonus and other variable allowances.
Old PF Contribution – New PF Contribution – 14000+1900=15900, |
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| Example No.:4
In case when Gross Salary is more than ₹ 15,000/- Per Month, and Basic is also more than ₹15,000 per month, and Management Currently Contributes PF on restricted / Statutory wages Ceiling. |
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Old PF Contribution – 15,000 X 12% = 1800/-New PF Contribution – 15,000 X 12% = 1800/- (NO CHANGE) (PF Ceiling Cap |
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| Example No.:5
In case when Gross Salary is more than ₹15,000/- Per Month, and Basic is also more than ₹ 15,000 per month, and Management Contributes PF on actual Basic. |
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Old PF Contribution – 25,000 X 12% = 3000/-New PF Contribution – 25,000 X 12% = 3000/- (NO CHANGE) Since SC Judgment has not touched upon the impact of those contributing PF on amounts exceeding ₹15,000 per month which is the statutory wage limit. |