Dear All,
Please find an article published in today's TOI on "Save more in provident fund, but take home less as salary" by Lubna Kably, for your information and discussions, as given below:
MUMBAI: A recent circular issued by the Employees Provident Fund Organisation, which comes under the Ministry of Labour and Employment, will reduce the take-home pay of salaried employees. According to this circular, various allowances paid to employees will have to be added back to the basic salary, and provident fund contributions computed against this higher value. This, in turn, will result in a lower take-home pay.
The circular, dated November 30, 2012, was issued after internal review meetings held in late November and has been forwarded to Employee Provident Fund offices across India.
Historically, most companies have been computing provident fund (PF) contributions (at 12% each by the employer and employee) against basic salary and dearness allowance only. However, the definition of basic wages has been a contentious issue, with PF authorities claiming that companies split the basic wages into various allowances to reduce the quantum of PF contributions.
The circular addresses this "splitting up" practice adopted by employers. It states that basic wages will include all allowances that are "ordinarily, necessarily, and uniformly" paid to employees. Thus, various allowances such as conveyance, educational allowance, medical allowance, etc., will have to be taken into consideration while computing the PF contribution.
Last year, the Madras High Court and the Madhya Pradesh High Court, in two separate cases, held that various allowances paid by the employer to its employees under different heads, such as conveyance, education, food concession, medical, special holidays, night shift incentives, city compensatory allowance, etc., qualify as basic wages under section 2(b) of the PF Act and need to be included while computing the PF contribution.
Based on these judgments, PF officials conducted audits on India Inc. and raised demands to recover the differential PF contributions. Subsequently, pending dismissal of the writ petitions filed by these companies, the audits were held in abeyance.
"Following this circular, the PF officials may once again commence audits of Indian companies to ascertain whether the PF contribution has been rightly computed and deposited," says Yatin Pathak, a chartered accountant.
Sonu Iyer, a partner at Ernst and Young, points out a possible shelter that could be available for employees in India. The Proviso to paragraph 26A of the PF Scheme allows PF contributions by the employee as well as the employers on a maximum notional level of Rs. 6,500 per month, instead of the entire salary (including various allowances). The rate remains the same at 12% each for the employer and employee contributions, respectively.
"Not many employers have opted for this route, as PF is part of the employee's cost to the company and it also provides a tax shield to the employees. Now, if the employer organization suddenly wishes to exercise this option and compute PF contributions only against Rs. 6,500 per month, it is not clear whether the PF authorities will oblige," Iyer explains.
Expatriate workers from India also have to contribute to PF, even if their salary is paid outside India (unless they have an exemption owing to a social security arrangement with the country to which they have been deputed). Unfortunately, for them, this notional limit of Rs. 6,500 doesn't apply. "If an employer has expat workers, there is a higher likelihood of them being subject to scrutiny by PF authorities," adds Iyer.
A similar matter is up for interpretation before the Supreme Court, but until then, PF authorities are likely to commence audits and raise demands on India Inc, based on the circular.
I invite discussion on this topic.
Thanks and regards.
Keshav Korgaonkar
From India, Mumbai
Acknowledge(0)
Amend(0)
2636Please find an article published in today's TOI on "Save more in provident fund, but take home less as salary" by Lubna Kably, for your information and discussions, as given below:
MUMBAI: A recent circular issued by the Employees Provident Fund Organisation, which comes under the Ministry of Labour and Employment, will reduce the take-home pay of salaried employees. According to this circular, various allowances paid to employees will have to be added back to the basic salary, and provident fund contributions computed against this higher value. This, in turn, will result in a lower take-home pay.
The circular, dated November 30, 2012, was issued after internal review meetings held in late November and has been forwarded to Employee Provident Fund offices across India.
Historically, most companies have been computing provident fund (PF) contributions (at 12% each by the employer and employee) against basic salary and dearness allowance only. However, the definition of basic wages has been a contentious issue, with PF authorities claiming that companies split the basic wages into various allowances to reduce the quantum of PF contributions.
The circular addresses this "splitting up" practice adopted by employers. It states that basic wages will include all allowances that are "ordinarily, necessarily, and uniformly" paid to employees. Thus, various allowances such as conveyance, educational allowance, medical allowance, etc., will have to be taken into consideration while computing the PF contribution.
Last year, the Madras High Court and the Madhya Pradesh High Court, in two separate cases, held that various allowances paid by the employer to its employees under different heads, such as conveyance, education, food concession, medical, special holidays, night shift incentives, city compensatory allowance, etc., qualify as basic wages under section 2(b) of the PF Act and need to be included while computing the PF contribution.
Based on these judgments, PF officials conducted audits on India Inc. and raised demands to recover the differential PF contributions. Subsequently, pending dismissal of the writ petitions filed by these companies, the audits were held in abeyance.
"Following this circular, the PF officials may once again commence audits of Indian companies to ascertain whether the PF contribution has been rightly computed and deposited," says Yatin Pathak, a chartered accountant.
Sonu Iyer, a partner at Ernst and Young, points out a possible shelter that could be available for employees in India. The Proviso to paragraph 26A of the PF Scheme allows PF contributions by the employee as well as the employers on a maximum notional level of Rs. 6,500 per month, instead of the entire salary (including various allowances). The rate remains the same at 12% each for the employer and employee contributions, respectively.
"Not many employers have opted for this route, as PF is part of the employee's cost to the company and it also provides a tax shield to the employees. Now, if the employer organization suddenly wishes to exercise this option and compute PF contributions only against Rs. 6,500 per month, it is not clear whether the PF authorities will oblige," Iyer explains.
Expatriate workers from India also have to contribute to PF, even if their salary is paid outside India (unless they have an exemption owing to a social security arrangement with the country to which they have been deputed). Unfortunately, for them, this notional limit of Rs. 6,500 doesn't apply. "If an employer has expat workers, there is a higher likelihood of them being subject to scrutiny by PF authorities," adds Iyer.
A similar matter is up for interpretation before the Supreme Court, but until then, PF authorities are likely to commence audits and raise demands on India Inc, based on the circular.
I invite discussion on this topic.
Thanks and regards.
Keshav Korgaonkar
From India, Mumbai
Acknowledge(0)Amend(0)
Hi, Please let me know whether this will be applicable to organization who maintains PF in their own trust. Any idea on effective date. Regards, Shrinivas
From India, Bangalore
Acknowledge(0)Amend(0)
From India, Bangalore
Acknowledge(0)Amend(0)
Dear All The circular is attached herewith alongwith the Madras High Court ruling of last year
From India, Mumbai
Acknowledge(0)Amend(0)
From India, Mumbai
Acknowledge(0)Amend(0)
Dear All,
I really want to know when for the first time (date/month) any such circular has been circulated? My comment is that if it's really coming into the picture, it should not be postdated. Ideally, they can implement this new circular with effect from January 2013 or any other such date.
Thanks
From India, Mumbai
Acknowledge(0)Amend(0)
I really want to know when for the first time (date/month) any such circular has been circulated? My comment is that if it's really coming into the picture, it should not be postdated. Ideally, they can implement this new circular with effect from January 2013 or any other such date.
Thanks
From India, Mumbai
Acknowledge(0)Amend(0)
Dear All,
I have not come across any circular by EPFO dated 30.11.2012 except on 7A guidelines. The said circular was posted by me yesterday under the subject: 7A guidelines by EPFO dated 30.11.2012.
The said circular at point no. 12 says as follows:
SPLITTING OF WAGES - Basic wages, by its own definition, encompass all the payments except the specified exclusions. All such allowances that are ordinarily, necessarily, and uniformly paid to the employees are to be treated as part of the basic wages. The confusion in the definition of wages (and hence the issue of splitting of wages) primarily arises from the expression "commission or any other similar allowance payable to the employee" in Section 2(b)(ii) of the Act. "Commission" and "any other similar allowance" are read as two separate expressions, and hence "any other allowance" is read as an omnibus exclusion, thereby encouraging the subterfuge of splitting of wages to exclude the PF liabilities. 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. Thus, "basic wages" are subject to exclusions expressly referred to in the above definition and no other.
It seems the author of the article is referring to this circular and point no. 12 therein.
Members of the forum are requested to discuss this topic and come to some conclusion.
Thanks and regards.
Keshav Korgaonkar
From India, Mumbai
Acknowledge(0)Amend(0)
I have not come across any circular by EPFO dated 30.11.2012 except on 7A guidelines. The said circular was posted by me yesterday under the subject: 7A guidelines by EPFO dated 30.11.2012.
The said circular at point no. 12 says as follows:
SPLITTING OF WAGES - Basic wages, by its own definition, encompass all the payments except the specified exclusions. All such allowances that are ordinarily, necessarily, and uniformly paid to the employees are to be treated as part of the basic wages. The confusion in the definition of wages (and hence the issue of splitting of wages) primarily arises from the expression "commission or any other similar allowance payable to the employee" in Section 2(b)(ii) of the Act. "Commission" and "any other similar allowance" are read as two separate expressions, and hence "any other allowance" is read as an omnibus exclusion, thereby encouraging the subterfuge of splitting of wages to exclude the PF liabilities. 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. Thus, "basic wages" are subject to exclusions expressly referred to in the above definition and no other.
It seems the author of the article is referring to this circular and point no. 12 therein.
Members of the forum are requested to discuss this topic and come to some conclusion.
Thanks and regards.
Keshav Korgaonkar
From India, Mumbai
Acknowledge(0)Amend(0)
Dear all,
I received the information through "Times of India" newspaper on December 11, 2012. The main title was "SAVE MORE IN PF BUT TAKE LESS HOME AS SALARY." They mentioned that previously the PF contribution was being computed as 12% of basic and DA. However, now it will be computed on basic + DA + all allowances. They provided an example:
Employee basic: 25,000
Conveyance: 5,000
Special incentive: 3,000
Previously, we calculated PF as 12% of basic i.e., 25,000 * 12% = 6,000. Now, it will be 33,000 * 12% = 7,920. They did not mention the PF limit, whether it was last at 6,500 or if there is a new calculation now. Employees with basic and DA exceeding 6,500 were not legally bound to contribute to PF, but the newspaper did not specify any PF limit.
If you have any information regarding the new PF limit, please inform me and others through Cite HR.
Thank you.
From India, Chandigarh
Acknowledge(0)Amend(0)
I received the information through "Times of India" newspaper on December 11, 2012. The main title was "SAVE MORE IN PF BUT TAKE LESS HOME AS SALARY." They mentioned that previously the PF contribution was being computed as 12% of basic and DA. However, now it will be computed on basic + DA + all allowances. They provided an example:
Employee basic: 25,000
Conveyance: 5,000
Special incentive: 3,000
Previously, we calculated PF as 12% of basic i.e., 25,000 * 12% = 6,000. Now, it will be 33,000 * 12% = 7,920. They did not mention the PF limit, whether it was last at 6,500 or if there is a new calculation now. Employees with basic and DA exceeding 6,500 were not legally bound to contribute to PF, but the newspaper did not specify any PF limit.
If you have any information regarding the new PF limit, please inform me and others through Cite HR.
Thank you.
From India, Chandigarh
Acknowledge(0)Amend(0)
Dear Members,
There is no need to panic over this article. This platform should be used for discussing the article in light of recent case laws and matters before the Honorable Supreme Court. According to me, the judgment of the Honorable Supreme Court, when it comes, will be the ultimate decisive move.
Thanks and regards,
Keshav Korgaonkar
From India, Mumbai
Acknowledge(0)Amend(0)
There is no need to panic over this article. This platform should be used for discussing the article in light of recent case laws and matters before the Honorable Supreme Court. According to me, the judgment of the Honorable Supreme Court, when it comes, will be the ultimate decisive move.
Thanks and regards,
Keshav Korgaonkar
From India, Mumbai
Acknowledge(0)Amend(0)
Dear All,
Editorial opinion of ET (dated 12.12.2012) is as follows:
"Forcing workers to divert more of their salary to the provident fund is wrong."
The Employees' Provident Fund Organisation's (EPFO) decision to include all allowances in the salary amount, of which 24% (12% each by the employee and by the employer) has to be mandatorily saved with the PF, is downright retrograde. It thinks it is helping employees, preventing employers from lowering their contribution to the employee's retirement savings.
This is pure delusion. All that would happen is that the employee's take-home salary would come down drastically, she would get to spend less, and get to save less in a manner of her choosing and end up with both lower present consumption and lower deferred consumption, given the miserable track record of the EPFO in managing workers' savings. The move would also depress overall growth: consumer spending would be constrained as Indian workers practice forced austerity.
The circular was apparently prompted by two independent rulings, by the Madras High Court and the Madhya Pradesh High Court, holding the various allowances paid by the employer to the employee to be part of basic wages. Historically, most companies have computed PF contributions as a share of basic salary and dearness allowance.
The EPFO claims that employers split wages into different allowances to reduce their PF contributions. However, the contribution to the PF is a part of an employee's cost to the company (CTC). An employer can restructure the entire salary, including PF contributions, to keep CTC unchanged.
The EPFO's new norms would only serve to curtail an employee's consumption and freedom to choose how to save for the future. The agency would grab hold of all savings and invest them in its retarded manner and generate tiny returns. It turns to perverse means, such as dipping into inoperative accounts, to enhance its payout.
The larger point is that the management of the EPF is terrible, unlike in the case of the National Pension System (NPS), in which employees have some choice in the allocation of their savings to different instruments with different risk-reward profiles. The only reform that the EPFO warrants is voluntary migration of workers to the NPS, along with their employers' contribution.
This is for your information.
Thanks and regards.
Keshav Korgaonkar
From India, Mumbai
Acknowledge(0)Amend(0)
Editorial opinion of ET (dated 12.12.2012) is as follows:
"Forcing workers to divert more of their salary to the provident fund is wrong."
The Employees' Provident Fund Organisation's (EPFO) decision to include all allowances in the salary amount, of which 24% (12% each by the employee and by the employer) has to be mandatorily saved with the PF, is downright retrograde. It thinks it is helping employees, preventing employers from lowering their contribution to the employee's retirement savings.
This is pure delusion. All that would happen is that the employee's take-home salary would come down drastically, she would get to spend less, and get to save less in a manner of her choosing and end up with both lower present consumption and lower deferred consumption, given the miserable track record of the EPFO in managing workers' savings. The move would also depress overall growth: consumer spending would be constrained as Indian workers practice forced austerity.
The circular was apparently prompted by two independent rulings, by the Madras High Court and the Madhya Pradesh High Court, holding the various allowances paid by the employer to the employee to be part of basic wages. Historically, most companies have computed PF contributions as a share of basic salary and dearness allowance.
The EPFO claims that employers split wages into different allowances to reduce their PF contributions. However, the contribution to the PF is a part of an employee's cost to the company (CTC). An employer can restructure the entire salary, including PF contributions, to keep CTC unchanged.
The EPFO's new norms would only serve to curtail an employee's consumption and freedom to choose how to save for the future. The agency would grab hold of all savings and invest them in its retarded manner and generate tiny returns. It turns to perverse means, such as dipping into inoperative accounts, to enhance its payout.
The larger point is that the management of the EPF is terrible, unlike in the case of the National Pension System (NPS), in which employees have some choice in the allocation of their savings to different instruments with different risk-reward profiles. The only reform that the EPFO warrants is voluntary migration of workers to the NPS, along with their employers' contribution.
This is for your information.
Thanks and regards.
Keshav Korgaonkar
From India, Mumbai
Acknowledge(0)Amend(0)
Dear Friends,
Keshav Korgoankar is right; we should not panic at this stage as the amendment or change made by the Authority only, not newspapers. Till today, the judgment given by the Honorable Supreme Court in Bridge Roof Company vs. Union of India in the matter of "Basic Wages" is still valid.
Regards,
Arihant
From India, Surat
Acknowledge(0)Amend(0)
Keshav Korgoankar is right; we should not panic at this stage as the amendment or change made by the Authority only, not newspapers. Till today, the judgment given by the Honorable Supreme Court in Bridge Roof Company vs. Union of India in the matter of "Basic Wages" is still valid.
Regards,
Arihant
From India, Surat
Acknowledge(0)Amend(0)
Dear All,
Unions want EPFO circular withdrawn
New Delhi: Trade unions have joined hands to demand the withdrawal of the Employees' Provident Fund Organization's recent circular barring investigations beyond seven years and making it tough for employees to claim their statutory dues.
In a circular issued on November 30, the day central provident fund commissioner R C Mishra retired, EPFO set a limitation on assessment beyond seven years. In addition, it put curbs on inquiries where a company fails to produce records. The move is seen to be especially beneficial for real estate and construction companies that depend on project-specific migrant labor.
In a letter to the labor secretary, Hind Mazdoor Sabha secretary A D Nagpal, who is also a member of the EPFO board, said the clause amounted to interference in the quasi-judicial powers of the assessing officer, which in any case was pending before the Supreme Court. He cited an order by the Bombay High Court to argue the case and said, "By these directions, we are giving undue advantage to employers who will get the benefit of non-production of records."
Citus A K Padmanabhan said, "It is anti-worker, and it should not be allowed. All unions are opposing it."
This is for your information.
Thanks and regards,
Keshav Korgaonkar
From India, Mumbai
Acknowledge(0)Amend(0)
Unions want EPFO circular withdrawn
New Delhi: Trade unions have joined hands to demand the withdrawal of the Employees' Provident Fund Organization's recent circular barring investigations beyond seven years and making it tough for employees to claim their statutory dues.
In a circular issued on November 30, the day central provident fund commissioner R C Mishra retired, EPFO set a limitation on assessment beyond seven years. In addition, it put curbs on inquiries where a company fails to produce records. The move is seen to be especially beneficial for real estate and construction companies that depend on project-specific migrant labor.
In a letter to the labor secretary, Hind Mazdoor Sabha secretary A D Nagpal, who is also a member of the EPFO board, said the clause amounted to interference in the quasi-judicial powers of the assessing officer, which in any case was pending before the Supreme Court. He cited an order by the Bombay High Court to argue the case and said, "By these directions, we are giving undue advantage to employers who will get the benefit of non-production of records."
Citus A K Padmanabhan said, "It is anti-worker, and it should not be allowed. All unions are opposing it."
This is for your information.
Thanks and regards,
Keshav Korgaonkar
From India, Mumbai
Acknowledge(0)Amend(0)Looking for something specific? - Join & Be Part Of Our Community and get connected with the right people who can help. Our AI-powered platform provides real-time fact-checking, peer-reviewed insights, and a vast historical knowledge base to support your search.