BackDYK: Entire regular salary should be considered for EPF
The EPFO circular defines basic wages as payments that are ordinarily, necessarily, uniformly paid.
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On 30 November, a circular from the Employees’ Provident Fund Organisation (EPFO) caused a stir. The circular suggested a higher EPF contribution, which in other words would have meant a higher cost for the employer and lower take-home salary for the employee. You contribute 12% of your salary to the EPF every month and your employer matches this contribution. Eventually this circular was put on hold by the government. But it’s not as if the circular was announcing a new provision or amending the current EPF laws. It merely re-emphasized the definition of salary for the purpose of EPF contribution.
EPF contribution
You contribute 12% of your salary (EPF defines it as basic wages plus dearness allowance plus retaining allowance) to EPF and your employer matches that contribution. Basic wages, as per the Employees’ Provident Fund Scheme, 1952 means all emoluments which are earned by an employee in accordance with the terms of the contract of employment and which are paid or payable in cash to him but does not include cash value of any food concession, dearness allowance, house rent allowance, overtime allowance, bonus, commissions or any other similar allowance and presents made by the employer.
The circular simply clarifies the definition of basic wages further. It says: “Basic wages by its own definition encompasses all the payments that are ordinarily, necessarily and uniformly paid to employees." The reason why the circular reinforced the definition of salary eligible for EPF contribution was because it was observed that some establishments were bifurcating salaries into two components: basic wages and other allowances and were contributing EPF only on the basic wages. The circular states: “The confusion in definition of wages primarily arises from the expression ‘commission or any other similar allowance’ as ‘commission’ and ‘any other similar allowance’ are read as two separate expressions and hence ‘any other allowance’ is read as an omnibus exclusion. The expression ‘commission or any other similar allowance payable to the employee’ is one continuous term meaning commission or any other commission-like allowance by whatever nomenclature referred."
What it means for you
EPF contributions on a higher salary level means that you invest more in a tax-free instrument that is also capable of generating positive return after inflation. Also it does not really increase the cost for the employer. For employees who earn more than 6,500, EPF is a voluntary scheme. You can contribute 12% of your salary or even more in EPF. However the maximum liability of the employer is restricted only till 12% of 6,500, or 780. But in certain cases like expat employees who contribute to the EPF, the employer will need contribute 12% of the entire salary eligible for EPF contribution.
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