Hello everyone,
As per the new amendment, PF Calculation has changed. Previously, we used to calculate 12% of the employee PF contribution from (Basic + DA), but after the amendment, it needs to be calculated from (Gross - HRA). So, two pay components are now compulsory in this calculation. The first one is BASIC, which is calculated as 40-50% of the Net salary, and the second one is HRA. Now, should we calculate 40% from Basic or Net salary?
For example: If the salary is 18000, the basic is 7200, which is 40% of the salary, and HRA.
1. 40% from the net salary is 7200.
2. 40% from the basic salary is 2880.
Which one is correct, so that we can arrive at the PF wage to calculate PF?
From India, Dharmapuri
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As per the new amendment, PF Calculation has changed. Previously, we used to calculate 12% of the employee PF contribution from (Basic + DA), but after the amendment, it needs to be calculated from (Gross - HRA). So, two pay components are now compulsory in this calculation. The first one is BASIC, which is calculated as 40-50% of the Net salary, and the second one is HRA. Now, should we calculate 40% from Basic or Net salary?
For example: If the salary is 18000, the basic is 7200, which is 40% of the salary, and HRA.
1. 40% from the net salary is 7200.
2. 40% from the basic salary is 2880.
Which one is correct, so that we can arrive at the PF wage to calculate PF?
From India, Dharmapuri
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Even prior to the amendment, PF was to be contributed on the whole salary excluding any allowance paid for house rent. When you pay HRA uniformly to all the employees without considering whether the employees reside in their own houses or rented houses, then that will become a part of the salary only. HRA is an allowance paid to certain employees who are asked to stay in rented premises for meeting business requirements. In your pay structure, it is a component of salary, and obviously, you deduct the HRA component also when the employee takes leave (without pay). If the situation is that you pay full HRA if the employee is on leave, you can exclude it from PF qualifying wages.
Similarly, there is no ruling that basic wages should be so much of a percentage of net/take-home salary. Basic wages mean the total wages as per agreement, whereas allowances shall be a percentage of basic wage or on actuals like reimbursements.
However, if the salary exceeds Rs 15000, you can restrict the contribution to 12% of Rs 15000.
From India, Kannur
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4768Similarly, there is no ruling that basic wages should be so much of a percentage of net/take-home salary. Basic wages mean the total wages as per agreement, whereas allowances shall be a percentage of basic wage or on actuals like reimbursements.
However, if the salary exceeds Rs 15000, you can restrict the contribution to 12% of Rs 15000.
From India, Kannur
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There have been no amendments to the PF Act or rules in the recent past. However, there was a verdict from the Apex Court a few years ago guiding on how to consider PF Gross to deduct PF contributions every month. What Mr. Madhu. T K has explained is absolutely correct. I would just like to add that after the implementation of the new Labor Codes, the PF contribution will be based on wages (@10% of wages). Wages should be properly determined as per the definition of wages (Basic + DA).
S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions +91 98310 81531 USD HR Solutions – To strive towards excellence with effort and integrity
From India, New Delhi
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S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions +91 98310 81531 USD HR Solutions – To strive towards excellence with effort and integrity
From India, New Delhi
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Thank you for your valuable commends
House rent Allowance (HRA): HRA or House Rent Allowance: It is an amount paid out to
employees by companies for expenses related to rented accommodation.
HRA can be upto 50% of Basic for Metro Cities & 40% of Basic for Non-Metro Cities
Following three types of deduction schemes in general are followed by the Organizations in Optional
Cases:
Organization 1
Employer Cont. @12% of Actual (Gross – HRA)
Employee Cont. @12% of Actual (Gross – HRA)
Organization 2
Employer Cont. @12% of (Gross – HRA), upto limit of 15000
Employee Cont. @12% of (Gross – HRA), upto limit of 15000
Organization 3
Employer Cont. @12% of (Gross – HRA), upto limit of 15000
Employee Cont. @12% of Actual (Gross – HRA)
So HRA is the component to be consider important as per new verdict so is that valuable rementation to take 40% of basic for HRA or is there any other way
From India, Dharmapuri
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House rent Allowance (HRA): HRA or House Rent Allowance: It is an amount paid out to
employees by companies for expenses related to rented accommodation.
HRA can be upto 50% of Basic for Metro Cities & 40% of Basic for Non-Metro Cities
Following three types of deduction schemes in general are followed by the Organizations in Optional
Cases:
Organization 1
Employer Cont. @12% of Actual (Gross – HRA)
Employee Cont. @12% of Actual (Gross – HRA)
Organization 2
Employer Cont. @12% of (Gross – HRA), upto limit of 15000
Employee Cont. @12% of (Gross – HRA), upto limit of 15000
Organization 3
Employer Cont. @12% of (Gross – HRA), upto limit of 15000
Employee Cont. @12% of Actual (Gross – HRA)
So HRA is the component to be consider important as per new verdict so is that valuable rementation to take 40% of basic for HRA or is there any other way
From India, Dharmapuri
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An allowance that is paid to all employees should be part of basic wages.
HRA for any purpose, including income tax purposes as explained by Sasikumar Venkatesh, is an allowance only when it is paid separately and not along with the salary. However, many have interpreted it as a component of salary fixed by the employer for convenience.
If you receive HRA, you will still get it even if you take a few days' loss of pay leave.
If you make a proportionate deduction of HRA, that itself proves that it is part of your salary.
Hence, the principle of PF contribution on gross salary less HRA will not stand, although in practice, it is being followed by many employers.
From India, Kannur
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HRA for any purpose, including income tax purposes as explained by Sasikumar Venkatesh, is an allowance only when it is paid separately and not along with the salary. However, many have interpreted it as a component of salary fixed by the employer for convenience.
If you receive HRA, you will still get it even if you take a few days' loss of pay leave.
If you make a proportionate deduction of HRA, that itself proves that it is part of your salary.
Hence, the principle of PF contribution on gross salary less HRA will not stand, although in practice, it is being followed by many employers.
From India, Kannur
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Dear Sashikumar,
Even Mr. Madhu T K has been explained the position of HRA in detail, you feel that PF Gross should be (Monthly Gross - HRA), which many organizations are following. You have mentioned that for Metro cities, the maximum limit of HRA is 50% of basic and for non-metro, 40% of basic. There is no law in this regard. Only under ITAX Act for the calculation of rebate under HRA, there are three tests, one of which is 50% and 40% conditions. You have also mentioned in Organization 3 employee contribution is 12% on actual basic, which is VPF and not necessarily the amount will be 12% on actual basic. It may be 15% or 20% or anything else of the 15,000/- limit as VPF.
Now come what should be the % of HRA (though I agree with Madhu T K) - 40% of monthly gross or 40% of Basic. In your post, you have mentioned that Basic is 40% of the monthly gross, therefore, in my opinion, HRA should be 40% of Basic; otherwise, both Basic and HRA amounts will be the same and may not be accepted by the EPFO authority.
S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions +91 98310 81531 USD HR Solutions – To Strive towards excellence with effort and integrity
From India, New Delhi
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Even Mr. Madhu T K has been explained the position of HRA in detail, you feel that PF Gross should be (Monthly Gross - HRA), which many organizations are following. You have mentioned that for Metro cities, the maximum limit of HRA is 50% of basic and for non-metro, 40% of basic. There is no law in this regard. Only under ITAX Act for the calculation of rebate under HRA, there are three tests, one of which is 50% and 40% conditions. You have also mentioned in Organization 3 employee contribution is 12% on actual basic, which is VPF and not necessarily the amount will be 12% on actual basic. It may be 15% or 20% or anything else of the 15,000/- limit as VPF.
Now come what should be the % of HRA (though I agree with Madhu T K) - 40% of monthly gross or 40% of Basic. In your post, you have mentioned that Basic is 40% of the monthly gross, therefore, in my opinion, HRA should be 40% of Basic; otherwise, both Basic and HRA amounts will be the same and may not be accepted by the EPFO authority.
S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions +91 98310 81531 USD HR Solutions – To Strive towards excellence with effort and integrity
From India, New Delhi
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Thank you for all your knowledge sharing Since most experience persons like you are suggest to take HRA 40% From Grass so i have decided to take from Grass
From India, Dharmapuri
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From India, Dharmapuri
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Dear Mr Sasikumar Venkatesh,
You have raised a practical problem, but I guess you treating some components in improper way. For example:-
1. Net Salary (“first one is BASIC its calculate 40-50% from Net salary”):- Net Salary is secondary point (phase) of Gross & Basic Wages which comes after deducting PF, ESI, LWF, PT etc. from the Gross Wages. However, some deductions may be calculated on Gross and some on Basic Wages. In order to match negotiated Net Salary you can adjust the Basic and other components, but it is not practical to determine Basic on basis of Net Salary.
2. HRA:- You have presented 02 Form of HRA (i) PF Deduction & (ii) Income Tax Exemption. Both have different approaches. In a ideal situation the HRA should be 50% of Basic. So that all employees can avail maximum Tax Benefits (Metro and Non Metro). In the last you have mentioned “HRA 40% From Gross”, which is also not a right approach. HRA is always calculated to Basic not to Gross.
Seniors have shared their opinions. So it is advisable, first understand the different scenarios, consult the same with management than only choose the optimized option.
As per my opinion on basis of CTC you can choose from the below:-
1. Though the new Act still not implemented, but if you want to choose then keep 50% Basic (assuming rest 50% will be excluded salary to), pay 50% HRA of the Basic and cover rest in other components (in a way to make it tax friendly). For Example if CTC is 60,000 (Basic-30,000, HRA-15,000, PF-3,600, Bonus-2500, Gratuity-1443, PL-1250, Special Pay-6,207).
2. In r/o high salary you can apply Re-imbursement Policy (which will not count as part of the Wages). For example if CTC is 100,000 (Basic-40,000, HRA-20,000, PF-4,800, Bonus-3,332, Gratuity-1,924, PL-1667, Special Pay-8,277) and keep 20K in reimbursement (Fuel-10,000, Mobile-3,000, Tuition Fees-5,000, LTA-2,000).
3. If you want to follow the existing structure keep the Basic as 40%, Include 50% HRA (on Basic) and mention other components. For Example if CTC is 60,000 (Basic-24,000, HRA-12,000, PF-2,880, Bonus-2,000, Gratuity-1154, PL-1,000, Special Pay-16,966).
Hope the above will also help to clarify your doubts.
From India, Delhi
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You have raised a practical problem, but I guess you treating some components in improper way. For example:-
1. Net Salary (“first one is BASIC its calculate 40-50% from Net salary”):- Net Salary is secondary point (phase) of Gross & Basic Wages which comes after deducting PF, ESI, LWF, PT etc. from the Gross Wages. However, some deductions may be calculated on Gross and some on Basic Wages. In order to match negotiated Net Salary you can adjust the Basic and other components, but it is not practical to determine Basic on basis of Net Salary.
2. HRA:- You have presented 02 Form of HRA (i) PF Deduction & (ii) Income Tax Exemption. Both have different approaches. In a ideal situation the HRA should be 50% of Basic. So that all employees can avail maximum Tax Benefits (Metro and Non Metro). In the last you have mentioned “HRA 40% From Gross”, which is also not a right approach. HRA is always calculated to Basic not to Gross.
Seniors have shared their opinions. So it is advisable, first understand the different scenarios, consult the same with management than only choose the optimized option.
As per my opinion on basis of CTC you can choose from the below:-
1. Though the new Act still not implemented, but if you want to choose then keep 50% Basic (assuming rest 50% will be excluded salary to), pay 50% HRA of the Basic and cover rest in other components (in a way to make it tax friendly). For Example if CTC is 60,000 (Basic-30,000, HRA-15,000, PF-3,600, Bonus-2500, Gratuity-1443, PL-1250, Special Pay-6,207).
2. In r/o high salary you can apply Re-imbursement Policy (which will not count as part of the Wages). For example if CTC is 100,000 (Basic-40,000, HRA-20,000, PF-4,800, Bonus-3,332, Gratuity-1,924, PL-1667, Special Pay-8,277) and keep 20K in reimbursement (Fuel-10,000, Mobile-3,000, Tuition Fees-5,000, LTA-2,000).
3. If you want to follow the existing structure keep the Basic as 40%, Include 50% HRA (on Basic) and mention other components. For Example if CTC is 60,000 (Basic-24,000, HRA-12,000, PF-2,880, Bonus-2,000, Gratuity-1154, PL-1,000, Special Pay-16,966).
Hope the above will also help to clarify your doubts.
From India, Delhi
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Thank you for all your valuable comments.
Let's be clear in our organization. We usually calculate 12% PF from (Gross - HRA). Here, the basic is 40% of the net salary, and HRA is calculated at 40% of the basic.
For example: If the net salary is 18000, then 40% of the basic is 7200, and HRA at 40% of the basic is such that the (Gross - HRA) will be 15120.
The actual problem arises when the PF wage exceeds 15000 (PMKY) eligibility in PF, resulting in rejection. How can I overcome this issue?
If I calculate HRA from Gross or Net, this problem will be resolved. Are there any other legal ways to overcome this issue?
From India, Dharmapuri
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Let's be clear in our organization. We usually calculate 12% PF from (Gross - HRA). Here, the basic is 40% of the net salary, and HRA is calculated at 40% of the basic.
For example: If the net salary is 18000, then 40% of the basic is 7200, and HRA at 40% of the basic is such that the (Gross - HRA) will be 15120.
The actual problem arises when the PF wage exceeds 15000 (PMKY) eligibility in PF, resulting in rejection. How can I overcome this issue?
If I calculate HRA from Gross or Net, this problem will be resolved. Are there any other legal ways to overcome this issue?
From India, Dharmapuri
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Salary Sheet & PF PT Calculation & Challan Nov 2010.xls