Home / Politics / Policy /  EPFO revives bid to club allowances with basic pay

New Delhi: Reviving a bid to club allowances with basic pay for calculating mandatory provident fund deductions, the Employees’ Provident Fund Organisation (EPFO) on Wednesday ordered its field offices to inspect establishments that may be structuring their staff salaries in such a way as to reduce Provident Fund (PF) liabilities.

The contribution payable by an employer under the employees’ provident fund scheme of 1952 is calculated as a portion of basic wages, dearness allowances (including the cash value of any food concessions) and retention allowances payable to each employee, EPFO said in a circular to its offices.

“However, it has been observed that many employers split the total wages payable to their employees into several allowances in such a way that the said allowances are covered under the category of exclusions provided under section 2(b) of the Act...thereby encouraging subterfuge of splitting of wages to exclude the PF liability," said the circular, a copy of which has been reviewed by Mint.

EPFO, which functions under the labour ministry, said instances had come to its notice in which the total wages of employees are split by employers to an extent that their PF liability is reduced by as much as 50%.

Clubbing of allowances for calculating the PF contribution will increase employees’ retirement savings, but will also have an impact on their take-home salaries. It will also increase the burden on employers, who will have to contribute more.

Every month, a worker contributes 12% of his/her basic pay to the EPF and a matching contribution is made by the employer.

PF authorities said the circular won’t have an impact on organized sector employees who earn more than the minimum mandatory PF threshold. PF deduction is mandatory for organized sector workers whose salary is 6,500 per month. This threshold has been increased to 15,000 but this has not been notified yet.

A labour ministry official, who requested anonymity, said EPFO field offices had been directed to inspect establishments and send a report back to the organization’s headquarters in New Delhi by 7 September. The future course of action will depend on the outcome of the exercise.

“In order to understand the gravity of the issue, it has been decided to have all those establishments inspected where the employers have deducted PF contribution on 50% (or even less) of total wages paid to their employees. So all officers in charge of field offices are directed to get such establishments inspected where PF contribution has been deducted on 50% or less of total wages," the circular said.

EPFO manages a corpus of more than 6 trillion. The annual provident fund accrual rose 16% in the 2013-14 financial year from the previous year. More than 800,000 establishments are under the retirement fund manager.

It is difficult to justify the 24% deduction from a low-paid employee’s salary for provident fund savings, said Rituparna Chakraborty, president of lobby group Staffing Federation of India.

“Lowly paid workers want more salary at hand and clubbing several allowances to calculate PF will only reduce their take-home salary," said Chakraborty.

The federation has suggested to the labour ministry to keep the employers’ contribution mandatory and make employees’ contribution optional.

“In the name of social security, a significant portion of their salary goes for PF—a subject they don’t understand much," said Chakraborty, who is a senior vice-president at Teamlease Services Pvt. Ltd, a staffing company.

The retirement fund manager said on Wednesday in a separate statement that it wanted to make inspection of establishments more transparent and objective and make its inspectors more accountable. Once an inspection is completed, the findings will be uploaded on the organization’s website, “thereby placing the same in the public domain for scrutiny".

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