New Delhi: The Supreme Court on Thursday ruled that ‘special allowance’ must be included in basic pay for calculation of provident fund (PF) deduction from employees and the company, the Times of India reported. This move will have wide financial ramification on companies and well as on the take home salary of employees.
A bench of Justices Arun Mishra and Naveen Sinha dismissed appeals filed by many companies questioning the Provident Fund Commissioner’s decision to club basic pay with special allowances for the purpose of deduction of PF and matching contribution by employers.
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.
According to the ToI report, giving his judgement, Justice Sinha said, “The wage structure and the components of salary have been examined on facts, both by the authority and the appellate authority under the Act, which have arrived at a factual conclusion that 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 PF account of the employees.”
“There is no occasion for us to interfere with the concurrent conclusions of facts. The appeals by the establishments therefore merit no interference. Conversely, for the same reason, the appeal preferred by the Regional Provident Fund Commissioner deserves to be allowed,” the top court added.
Explaining the verdict, the bench of Justices Mishra and Sinha said, “No material has been placed by the establishments to demonstrate that the allowances in question (special allowance) being paid to its employees were either variable or were linked to any incentive for production resulting in greater output by an employee and that the allowances in question were not paid across the board to all employees in a particular category or were being paid especially to those who avail of the opportunity.
However, the top court judgement is unlikely to impact those with basic salary and special allowances above Rs 15,000 a month, former PF commissioners and consultants told the publication.
How it impacts your take-home pay
An employee contributes 12% of his basic salary to EPF along with a matching contribution from his employer. As per Section 2(b) of PF act, basic wage refers to all emoluments given to an employee excluding the following:
1) Dearness allowance, house rent allowance, overtime, bonus, commission on business sourcing or any other allowance
2) Cash value of food coupon
3) Any present made by the establishment
However, following the apex court judgement, if special allowance is considered as a part of basic pay, your take-home salary will be reduced by 24% of special allowance (12% as employee’s contribution and 12% as employer’s contribution). Although this will help you help built a big retirement corpus, it is definitely going to hurt your lifestyle.