Earlier this month, the Supreme Court changed the rules for the Employee Provident Fund (EPF). The court said that the Employers cannot separate the special allocation while accounting for Provident Fund (PF) contribution. In such a situation, it is very important to know how much the impact will be on the staff. In simple words, it is a positive decision in terms of savings by the Supreme Court. At present, part of the PF is decided on the basis of basic salary and dearness allowance. But, now the special allowance and other types of allowances have been added to it. Now the Take Home Salary will be low because of the court’s decision but saving will be much higher.

What are the old EPF rules?

It is necessary for every private company employer, with more than 20 employees to bring employees to the purview of the EPF. Under this scheme, the employer has to deduct 12 percent of basic salary and dearness allowance of the employee and deposit the same in the employee’s EPF Account. According to the Employees’ Provident Fund (EPF) Act, 1952, 12% of an employee’s Basic Salary and Dearness Allowance (DA) have to be invested into EPF and the employer needs to invest an equal sum. For example, if your Basic Salary and Dearness Allowance add up to ₹12,000, your employer has to deduct ₹1,440 towards PF every month and match it with ₹1,440 from its own pocket. Both these amounts are, typically, a part of the cost to company (CTC).

Employers, however, often exclude Special Allowance, Travel Allowance or Canteen Allowance while computing PF deduction. For example, if your basic salary and dearness allowance add up to ₹30,000 and you get ₹10,000 as special allowance another ₹10,000 as conveyance allowance, your employer may only deduct 12% of ₹30,000 or ₹3,600. This keeps the “in-hand” salary high and reduces the CTC for the company.

What are the new EPF rules?

The Supreme Court order that states that special allowances will have to be clubbed with basic salary and dearness allowances for provident fund contribution calculation, which will bring down the take-home salary of the employees under the mandatory EPF cover. The Supreme Court ruled that any allowance that is variable from employee to employee depending on their work output (e.g. overtime allowance) will not be used for the PF contribution. Only those allowances normally paid to all employees will be used to compute PF contribution. For example, if your basic salary and dearness allowance add up to ₹30,000 and you get ₹10,000 as special allowance another ₹10,000 as conveyance allowance, according to the new rules, your employer will be required to deduct 12% of ₹50,000 or ₹6,000. This reduces the “in-hand” salary high that an employee receives at the end of the month.

What did the Supreme Court say?

The Supreme Court has enacted these changes on the Allowance (Rule of Universality). The court ruled that if any special allowances are paid to employees and are not variable or linked to any production incentive, they should be included in the calculation for PF Contribution. The Supreme Court has made it mandatory to include such allowances in the salary limit for PF deduction.

What are the impacts of the Supreme Court’s decision?

There are four major impacts of this ruling. First, the employees earning more than ₹15,000 in basic wages plus dearness allowance will not be affected. This is because employers of these types of workers are exempted from making PF contributions on amounts higher than ₹15,000. Even employers who were voluntarily deducting PF contributions on wages above ₹15,000 per month would not be hit by the latest Supreme Court decision.

Second, House Rent Allowance (HRA) is excluded by the definition of basic wages of the EPF Act, 1952 and hence will not be affected by the judgment.

Third, employees earning basic wages plus dearness allowance less than ₹15,000 per month may have to contribute a higher share of their CTC to the EPF but this will depend on the facts of each case.

Fourth, international workers posted in India may see a higher amount being deducted towards PF. Such workers are not exempted by the proviso exempting domestic workers earning more than ₹15,000 per month.

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