EPF allowances: Clarification by Jan

Written by Raj Kumar Ray | New Delhi | Updated: Dec 17 2012, 06:21am hrs
Labour ministry appoints committee to draw up list of allowances that should be part of basic wages

The labour ministry has asked the Employees Provident Fund Organisation to keep into abeyance the implementation of a new rule that calls for clubbing various allowances into the basic wage, until a new list of such allowances are drawn up by next month.

The ministry has appointed a committee to look into the legal aspects and clearly prescribe what constitute part of the basic wage, a labour ministry official told FE.

The circular cant be implemented unless we make sure it does not contradict what is mandated in the EPFO Act. We have given the committee a months time to draw up a list of allowances that should be part of basic wages and those which has to be kept out, the official said.

Although the EPFO Act mandates that basic salary should include only basic wages, dearness allowance including the cash value of any food concession and retaining allowance, the EPFO recently issued a circular that adopted a Supreme Court order and said all such allowances which are ordinarily, necessarily and uniformly paid to the employees are to be treated as part of the basic wages.

The employee has to contribute 12% of basic wages towards PF while employer makes a matching contribution up to the EPFOs basic wage limit of R6,500 per month. Most of the private companies include both the employees and employers PF contribution within the CTC.

The EPFO circular has created confusion on whether special allowances, transport allowance, medical, hostel and other allowances should be clubbed with the basic wage for PF calculations.

This has triggered fear that the net salary of employees may shrink due to higher PF contribution. It will also strain companies who decide to increase their PF contribution and raise the cost to the company (CTC) of employees.

EPFO has said the confusion in defining wages and, hence, the issue of splitting of wages primarily arises from the expression commission or any other similar allowance payable to the employee under Section 2(b) (ii) of the EPFO Act.

Although labour ministry officials say there was no malafide intent in the circular as far as employees are concerned and it was meant to help assessing officers to detect whether a company was paying the statutory dues adequately or evading them, experts say it has added to the confusion and greater clarity was needed after looking into the legal sanctity.

Many private companies and MNCs include their own and the employees PF contribution within the CTC. In such cases, the employees net salary will come down (if the new circular is implemented). In case of PSUs, where employers PF contribution is over and above the salary, then employees will be reduced slightly, said Vineet Agarwal, partner at KPMG.

However, Amitava Ghosh, a senior vice-president of TeamLease, says there is no such threat of the new EPFO circular in reducing the net pay of employees whose basic wages are well above the EPFO eligibility limit of up to R6,500 per month.

Wherever, the employer is contributing on wages more than R6,500 as basic pay, there is no such liability on the employer to pay PF on conveyance allowance or night shift allowance, he said.

To clear the haze, the authorities need to see whether the EPFO circular has legal sanction, E Balaji, CEO of Randstad India, advocated. Whether it is binding to all organisations, we need to wait and see. There could be cost implications and salary structures may have to be restructured, he said.