Your Employees’ Provident Fund (EPF) kitty may get a boost, but your take-home salary may take a hit, following the Supreme Court’s dismissal on 28 August 2019 of a review petition against its judgment on the definition of wages. SC, in its 28 February 2019 ruling, had said that while computing EPF, allowances that are not variable or linked to the employee’s efforts should be included. This increased the EPF deduction for several categories of employees.
Now the employer will have to increase your cost-to-company or CTC, if it chooses to absorb the additional PF contribution. If the employer chooses to pass on the cost to you, a larger part of your CTC will go towards EPF deduction.
The employer, typically, deducts 12% of your basic salary and dearness allowance towards EPF contribution and contributes an equal amount. However, employers can limit the PF deduction to 12% of ₹15,000 even if the basic salary is higher. For example, if your basic salary and dearness allowance add up to ₹50,000, your employer can choose to restrict PF deduction to 12% of ₹15,000 or ₹1,800. This also reduces the employer’s own matching contribution to ₹1,800.
Effect on employees
If your basic salary plus DA is more than ₹15,000, you will not be affected. Your employer can use Proviso to Para 26A of the Employees Provident Fund Scheme, 1952 to restrict the PF contribution to 12% of ₹15,000. Even if the employer is voluntarily deducting EPF on a basic salary and dearness allowance greater than ₹15,000, he will not be required to include the non-performance linked allowances and bonuses, according to Madhu Damodaran director, HR business services, CoAchieve Solutions Pvt. Ltd, a staffing firm.
If your basic salary plus DA is less than ₹15,000, you will be affected if you have allowances and payments such as conveyance or bonus (which is not linked to performance) as part of your CTC as the EPF calculation will happen on a higher figure.
Effect on employers
However, there’s lack of clarity on whether the court’s judgment is prospective or retrospective. Following the judgment, a number of regional PF commissioners sent out notices to companies asking for retrospective PF contribution, an executive at a staffing firm told Mint, on the condition of anonymity. Even if the application of the judgment is prospective, there could be a significant hike in costs for employers who may pass on the same to employees through higher PF deductions and lower take-home pay. However, this will not affect those with a basic salary and dearness allowance more than ₹15,000, he clarified.
Taking cognizance of the distress caused by PF notices, the EPFO on 28 August issued a circular asking its regional officials to desist from roving enquiries. It said that investigations shall be carried out only where credible evidence is available that the employer has engaged in the practice of avoiding EPF liability by splitting basic wages. In existing investigations, no coercive action shall be taken until the disposal of the review petition filed before the Supreme Court, the circular added. “The circular has references to the review petition. So, it is unclear whether it will still hold after the dismissal of the review petition," said Damodaran.
SC’s decision will not affect you if your basic pay plus dearness allowance is above ₹15,000. However, there may be cases where your actual pay is higher due to various allowances and bonuses. In this situation, your employer may now deduct a higher share of your salary.
While there is nothing you can do about that, it is important to keep track of your EPF account. You can register online to keep track of your transactions. To know how to check your EPF balance online, watch this video. If you move between employers, do transfer the balance to your current employer or you may face tax implications (read more at bit.