Supreme Court ruling on the computation of Provident Fund Contributions

By May 24, 2019 December 20th, 2019 No Comments

Hon’ble Supreme Court vide judgement dated 28 February 2019 in the case
of The Regional Provident Fund
Commissioner (II) West Bengal Vs Vivekananda Vidyamandir & Ors.,
disposing off multiple appeals, delivered a judgement on whether the special
allowances paid by an establishment to their employees would form part of
Basic Wages
under Section 2(b)(ii) read with Section 6 of the the Employees’ Provident Fund and Miscellaneous
Provision Act, 1952 (the “Act”)

for the purpose of computing provident fund
contributions under the Act.
Act defines ‘Basic Wages’ as all emoluments paid in cash to an employee in
accordance with the terms of their contract of employment. However, the Act does
not include the following emoluments:
the cash value of any food concession;
any dearness allowance that is to say, all
cash payments by whatever name called paid to an employee on account of a rise
in the cost of living, house-rent allowance, overtime allowance, bonus,
commission or any other similar allowance payable to the employee in respect of
his employment or of work done in such employment; and
any presents by the employer.
as per the Act, the employer as well as
the employee paid 12% (twelve per cent) of basic wages each towards
contribution for social security scheme run by the Employees’ Provident Fund
Organisation (“EPFO”).
The Hon’ble Supreme Court, vide its judgement, has held that the special
allowances, paid by employer to its employees, will fall under the definition
of ‘basic wages’ and hence subject to provident fund contributions thereby
affecting a number of establishments where employees’ salary
and special allowances are taken separately as employers will now have to match
it with similar contributions.
Hon’ble Court said that the test adopted to determine if any payment was to be
excluded from basic wage is that the payment under the scheme must have a
direct access and linkage to the payment of such special allowance as not being
common to all. In other words, where a so-called ‘special allowance’ or other
allowance is paid to all employees regardless of any circumstances, it is
liable to be included within the ambit of basic wage and provident fund
contributions paid thereon. The employer has a statutory obligation to deduct
the specified percentage of the contribution from the employee’s salary and
make matching contribution. The entire amount is then required to be deposited
in the fund within 15 (fifteen) days from the date of such collection.
Referring to Muir Mills Co. Ltd., Kanpur Vs. Its Workmen, AIR 1960 SC
, the Hon’ble Court also observed that any variable earning which
may vary from individual to individual according to their efficiency and
diligence will stand excluded from the term “basic wages”.
The Hon’ble Court in its judgement has clarified that only allowances of
the following nature can be excluded from ‘basic wages’ for calculating provident
fund contributions: 
allowances which are variable in
nature; or 
allowances which are linked to any
incentive for production resulting in greater output by an employee; or 
allowances which are not paid
across the board to all employees in a particular category; or 
allowance which are paid
especially to those who avail the opportunity. 
only the basic wage was considered for the calculation of provident fund. But,
now, the basic salary and special allowances will have to be clubbed together
for the purpose of provident fund deductions. For instance, if an employee’s
basic salary is Rs 10,000 and if he/she gets special allowances of Rs 5,000, the
provident fund deduction will be calculated on the basic salary and the special
allowance clubbed together, i.e., on a combined sum of Rs. 15,000.
The Hon’ble
Supreme Court’s decision is likely to impact those employees whose pay (being
their basic wages with dearness allowance, retaining allowance (if any) and
cash value of food concessions admissible thereon) is or was less than Rs
15,000. As for employees with pay exceeding Rs 15,000, there may be no
impact of the judgement on such employees.
As a
result of the above ruling by the Hon’ble Supreme Court, the employers are required
to review their provident fund contributions accordingly. Consequently and
significantly, this could reduce the take home pay and impact the employees at
lower pay levels.

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