Supreme Court on PF calculation: Will it affect your take-home salary?

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Representational Image
Representational Image

New Delhi : A recent verdict by Supreme Court on PF funding may have huge impact on your PF saving and even the total take-home pay you get. At present, as per the salary structure, the employees are supposed to contribute the compulsory 12 per cent of their Basic Salary or Wagetowards their PF.

Regarding the judgment related to EPFO, the apex court has ruled out 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.

Importantly, it means that the PF contribution will be on the total amount including all the allowances paid to an employee and not just on the basic salary.

But the main matter of concern is that if 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 Employees' Provident Funds and Miscellaneous Provisions Act, 1952 for computation of contribution towards employees’ provident fund.

Supreme Court stated, "No material has been placed by the establishments to demonstrate that the allowances in question being paid to its employees were either variable or were linked to any incentive for production resulting in greater output by an employee."

The Court also felt that "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 which he was otherwise required to put in."

As per the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, "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. 

Analysts believe that the impact of SC's decision could be two-fold. One, the contribution towards EPF will be on a higher amount and hence, less take-home pay for the employee. And, secondly, the retirement saving will be more as higher monthly PF contribution will move into the employee's PF account.