The apex
court has ruled that employers cannot segregate 'special allowance' from basic
wages for purpose of PF deductions. The Supreme Court has passed an order on
Provident Fund (PF) calculation that will have far-reaching impact on companies
and the salaried class.
A bench of
Justices Arun Mishra and Naveen Sinha yesterday ruled that employers cannot
segregate 'special allowance' from basic wages for purpose of PF deductions.
The court
was hearing a clutch of appeals questioning whether "the special
allowances paid by an establishment to its employees would fall within the
expression "basic wages" under Section 2(b)(ii) read with Section 6
of the Act for computation of deduction towards Provident Fund".
Note that
employers and employees both contribute 12% of wages in EPF. Under Section 2
(b), basic wages refer to all emoluments earned by an employee in accordance
with the terms of his/her employment contract but does not include the
following:
i)
The cash value of any food concession
ii)
Any dearness allowance, house rent allowance, overtime allowance, bonus,
commission, or any other similar allowance payable to the employee
iii)
Any presents made by the employer
What the
court said
The apex
court, however, noted that basic wages included Dearness Allowance for the
purposes of PF calculation. Furthermore, it pointed out that the appealing
establishments have not submitted any proof to demonstrate that the special
allowances being given to their employees "were either variable or linked
to any incentive for production" with visible results. "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," read the order.
Moreover,
there was no supporting material that the allowance in question "were not
paid across the board to all employees in a particular category or were being
paid especially to those who avail the opportunity". Hence, the court
ruled that the "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" and dismissed the appeals. "Conversely,
for the same reason the appeal preferred by the Regional Provident Fund
Commissioner deserves to be allowed," it added.
What this
means
The
Supreme Court judgment will translate to a higher
deduction for PF, which is good in terms of building the nest egg, but not
so much for your current lifestyle since it means a lower take-home salary. But
not everyone will be impacted by this development. "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," a former central
provident fund commissioner (CPFC) told The Times of India. The court ruling
could also result in a higher outgo in case of foreigners working in India.
Credit : Business Today
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