Ramesh L. Soni, Advisor

The Honourable Supreme Court of India haspassed a Judgment on 28th February, 2019 in case of Regional Provident Fund Commissioner (II), West Bengal vs. Vivekananda Vidyamandir & Others [Civil Appeal No 6221 of 2011]. A Bench of Justices Arun Mishra and Naveen Sinha ruled that employers cannot segregate ‘special allowance’ from basic wages for purpose of PF deductions.

The judgment of Supreme Court has to be understood in right perspective and has to be duly implemented. The Judgment of SC has now called a time for employers to do the necessary changes in their salary structure which shall fit in the frame of law. The judgment may also affect the in hand / take home salary of the employees and may also affect the cost & the liability of employer towards PF.

Earlier Senario

There is no law which prescribes any specific salary structure for any industry. There is also no mandatory component for ‘basic salary’. Therefore, it was on the management to derive a salary structure for its employees. The number of allowances, employer can determine was through contract of employment. At the time of appointing the employees and issuing them the appointment letters, employers frequently shown the splitting of their wages into several allowances. The employers had not deeply studied the definition of wages for payment of PF contributions. Some of the common allowances are given below :

  • Special Allowance (without any specialisation),

  • City Compensation Allowance (shown in salary at rural areas),

  • Conveyance Allowance,

  • Night Shift Allowance,

  • Leave Travel Allowance,

  • Medical Allowance,

  • Washing Allowance,

  • Punctuality Allowance,

  • Attendance Allowance,

  • Production Allowance,

  • Meal/Food Allowance,

  • Travelling Allowance,

  • Overtime Allowance, and various other allowances with any valid proof.

In the studies conducted by EPFO the authorities came across various instances that employers are showing allowances which was not supposed to be valid in the purview of the Act but was to save the liability towards PF Contribution.

Special allowance and other allowances is invariably given by the employers, in addition to basic wages, but when questioned by authorities for consideration of EPF dues, as what is the specialty for giving such a special allowance, no valid clarification was to be given by the employers. Earlier the Gujarat, Madhya Pradesh and Madras High Courts have held that all the allowances other than house rent allowance would attract provident fund contributions.

Despite that many employers have not taken interest to rectify their wage structures.

Latest Supreme Court Judgment on Provident Fund

This may have led to heavy financial liability towards the employers in addition to interest, damages, penalty and even prosecutions.

No valid proof has been given by the employer to demonstrate that the allowances which are in doubt are being paid to its employees were either:

  • variable, or

  • were linked to any incentive for production resulting into greater output by employee

  • that the such allowances were not paid to all employees in a particular category, or

  • were paid especially to those who avail the opportunity.

Employees’ Provident Fund Organization (EPFO) in a study found that a large number of firms were splitting their employees’ salary into various allowances so as to reduce their PF liabilities. The employers had been convincing their employees that the splitting of salary would result in higher take-home pay. The matter then went to court.

The question placed before the Bench for adjudication was whether special allowances paid by a company to its employees will fall within the expression ‘basic wages’ under Section 2(b)(ii) read with Section 6 of the PF Act for computation of deduction towards PF.

Legal Position


Sec. 2(b) “Basic wages” means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include-

  1. the cash value of any food concession;

  2. any dearness allowance that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living, house-rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;

  3. any presents made by the employer.

Sec 6. Contributions and matters which may be provided for in Schemes

The contribution which shall be paid by the employer to the Fund shall be ten per cent. Of the basic wages, dearness allowance and retaining allowance, if any, for the time being payable to each of the employees whether employed by him directly or by or through a contractor, and the employee’s contribution shall be equal to the contribution payable by the employer in respect of him and may, if any employee so desires, be an amount exceeding ten per cent of his basic wages, dearness allowance and retaining allowance if any, subject to the condition that the employer shall not be under an obligation to pay any contribution over and above his contribution payable under this section:

Provided that in its application to any establishment or class of establishments which the Central Government, after making such inquiry as it deems fit, may, by notification in the Official Gazette specify, this section shall be subject to the modification that for the words “ten per cent”, at both the places where they occur, the words “12 per cent” shall be substituted:

Provided further that where the amount of any contribution payable under this Act involves a fraction of a rupee, the Scheme may provide for rounding off of such fraction to the nearest rupee, half of a rupee, or quarter of a rupee.

Explanation I – For the purposes of this section dearness allowance shall be deemed to include also the cash value of any food concession allowed to the employee.

Explanation II – For the purposes of this section, “retaining allowance” means allowance payable for the time being to an employee of any factory or other establishment during any period in which

Latest Supreme Court Judgment on Provident Fund

the establishment is not working, for retaining his services.

Hon’ble Supreme Court –

The Supreme Court of India while dealing with various appeals considered the legal provisions, the purpose of the legislation on provident fund and some of its earlier decisions. After considering all the above, Supreme Court laid down a universal law as regards the allowances which will have to be considered for PF deduction.

In a given case if amount of allowance goes beyond the basic wages, it has to be shown that the employee concerned had become eligible to get this extra amount beyond the normal work which he was otherwise required to put in. The Hon’ble Supreme Court observed that “There is no data available on record to show what were the norms of work prescribed for those employees during the relevant period.

The Supreme Court has applied the “rule of universality” to the allowances.

If a particular allowance is universally paid by various employers and

  • is paid to all the employees of an establishment without any reference to the quantum of efforts put in by such employee or

  • the quantum of the output or,

  • the same takes the form of salary/ dearness allowance and needs to be included for the purpose of determining the quantum of PF deduction.

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.

So overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment shall stand excluded. Likewise any variable earning which may vary between individual according to their efficiency and diligence will stand excluded from the term “basic wages”.

Hon’ble Supreme Court held that – It is not possible to ascertain whether extra amounts paid to the employee as Special allowance, is in fact, paid for any extra work which had exceeded the normal quantum prescribed for the employee. If special allowance is paid for any special work or for any special assignment or that by way of incentive which in naturally not fixed, it should be excluded from the purview of ‘basic wages’. However when questioned by the PF authorities, the employer has to produce records and prove that the payment was not being paid necessarily, compulsorily and ordinarily to the employee(s).

In case the monthly pay for determining PF contributions exceed ₹ 15,000/-, the same can be restricted to ₹ 15,000/-. If the establishment has been already contributing without so restricting, the same can be continued. If it is decided to restrict it to ₹ 15,000/- now, it can be done with the concurrence of the RPFC concerned in accordance with the case law Marathwada Gramin Bank Karmachari Sanghatana and Another v. Management of Marathwada Gramin Bank and Others, SC, 9 Sep 2011 (Section 12 will not get attracted)


The ruling of the Hon’ble Supreme Court of India in case of Regional Provident Fund Commissioner (II), West Bengal v. Vivekananda Vidyamandir & Others [Civil Appeal No 6221 of 2011] will help the employers for determining the salary, salary structures, refreshing of the old policies and documentations with employees, so as to best fit in frame of law & especially in the view of Provident Fund compliances.


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