Dear Professionals,
Our establishment is registering under the Provident Fund (PF) for the first time. We are receiving different suggestions from our employees regarding the wage limits for PF contributions. Some employees are asking to consider the wage limit of ₹15,000, while others are suggesting that their PF be deducted on their full basic salary, even if it exceeds ₹15,000 (for example, ₹50,000).
Can we apply different wage limits for different employees in this case? What would be the best approach?
Thank you in advance for your guidance.
From India, Chennai
Our establishment is registering under the Provident Fund (PF) for the first time. We are receiving different suggestions from our employees regarding the wage limits for PF contributions. Some employees are asking to consider the wage limit of ₹15,000, while others are suggesting that their PF be deducted on their full basic salary, even if it exceeds ₹15,000 (for example, ₹50,000).
Can we apply different wage limits for different employees in this case? What would be the best approach?
Thank you in advance for your guidance.
From India, Chennai
Hi,
Few inputs:
- EPF is mandatory for monthly wages up to 15000/- (excluding HRA or variable pays) with 20 or more employees.
- Once EPF is registered, even if the number of employees is below 20, contributions must be paid and continued.
- It is not mandatory to contribute to EPF if wages are above 15000/-; however, it is considered a best practice to remain competitive in the market and uphold employee standards. The majority of establishments contribute based on actual wages (Basic) and include it as part of CTC.
- If an employer chooses to adhere to the 15000/- limit, VPF is an option for employees to contribute amounts above 15000/- in wages.
From India, Bangalore
2Few inputs:
- EPF is mandatory for monthly wages up to 15000/- (excluding HRA or variable pays) with 20 or more employees.
- Once EPF is registered, even if the number of employees is below 20, contributions must be paid and continued.
- It is not mandatory to contribute to EPF if wages are above 15000/-; however, it is considered a best practice to remain competitive in the market and uphold employee standards. The majority of establishments contribute based on actual wages (Basic) and include it as part of CTC.
- If an employer chooses to adhere to the 15000/- limit, VPF is an option for employees to contribute amounts above 15000/- in wages.
From India, Bangalore
It is always good if you follow a uniform system for all employees. If the employer's contribution is not expected to be on a maximum salary of Rs 15,000, then make it common for all employees. It is true that employees can opt to contribute based on a higher salary so that they will benefit from the 80C tax exemption. However, if you allow this at this stage, you will face a lot of adjustments in the HRMS/payroll software. Therefore, to start with, make the PF applicable only to those whose PF qualifying salary (let it be gross salary without HRA and variable pay) is not above Rs 15,000.
You should also inquire if there are any employees who are existing members of EPF as declared in their Form 11; if available, they should also be brought under EPF now. In the future, you can consider individual options of higher contribution, i.e., contribution at a higher rate or based on a higher basic salary.
From India, Kannur
You should also inquire if there are any employees who are existing members of EPF as declared in their Form 11; if available, they should also be brought under EPF now. In the future, you can consider individual options of higher contribution, i.e., contribution at a higher rate or based on a higher basic salary.
From India, Kannur
Thank you, Suraj Sir and Madhu Sir, for your insights.
I wanted to inquire about how we should structure the bifurcation of salaries, as currently, 100% of the CTC is being considered as the basic salary, with no allowances provided. This has resulted in a higher basic for all employees.
For instance, if the CTC is ₹50,000, what percentage should be allocated as the basic salary, how much should be considered as the employer's contribution towards PF (if we keep a minimum of Rs 1800 as PF)? Should we introduce any other allowances to keep the basic salary at a minimum level and if so what should be the % of CTC?
Since we are a new organization and haven't established any salary bifurcation yet, we believe it's prudent to implement one now as the company continues to grow steadily.
From India, Chennai
I wanted to inquire about how we should structure the bifurcation of salaries, as currently, 100% of the CTC is being considered as the basic salary, with no allowances provided. This has resulted in a higher basic for all employees.
For instance, if the CTC is ₹50,000, what percentage should be allocated as the basic salary, how much should be considered as the employer's contribution towards PF (if we keep a minimum of Rs 1800 as PF)? Should we introduce any other allowances to keep the basic salary at a minimum level and if so what should be the % of CTC?
Since we are a new organization and haven't established any salary bifurcation yet, we believe it's prudent to implement one now as the company continues to grow steadily.
From India, Chennai
There is no such rule that the salary should have bifurcation, and only a certain amount should be treated as basic pay. As per law, the amount of salary as per the contract of employment is wages/salary only. That is the wages on which you should contribute ESI, EPF, Bonus, Gratuity, etc. But under each Act, certain threshold limits are prescribed, and employees getting more than the prescribed amounts will go out of the coverage of each Act. Accordingly, an employee whose wages exceed Rs 21,000 per month will not be covered by ESI and Bonus. An employee whose wages exceed Rs 15,000 at the time of joining need not be given PF. At the same time, the entire sum will be treated as wages for the computation of gratuity.
There are unwritten practices adopted by HR professionals whereby they describe some elements of salary as 'allowances'. It is a system of showing the minimum amount as Basic Wages and showing the larger portion of the salary as allowances. This is just to reduce the statutory contributions towards PF, Bonus, Gratuity, etc. But there is no legal sanctity to this practice, and at the end of the day, the employer would be held responsible to pay the statutory contributions and payments on gross salary. It is true that allowances which are not fixed by amounts and are paid depending upon the category of employees, their place of posting, etc., are not part of the salary. But many HRs do not consider this rule but just keep the components as allowances out of the scope of wages.
Legally, whatever is earned by an employee is remuneration. Year on year, an employee is given an increase in salary. An increase in salary is given for two reasons: one, to compensate for the increase in the cost of living, and two, to reward his performance. The former is reflected by means of an increase in dearness allowance, and the latter is to be reflected in basic wages. Unfortunately, many private companies do not pay DA, and whatever increase is to be given will be added only under allowances. If this is brought to the appropriate authorities, then he will be able to establish very easily that allowances are not actually compensatory allowances but are part of wages only.
In order to avoid future confusions and risks, it is always good if you have a system of salary structure with basic salary, dearness allowance, and other allowances varying according to categories of employees and their place of posting. Moreover, the basic pay and dearness allowance should always be higher than the minimum wages notified by the state government. This will protect the employer to a certain extent.
In short, bifurcation is just an artificial arrangement. There are a lot of judgments which say that the total salary as per the contract of employment represents the wages as per law on which gratuity, PF, or other benefits should be calculated. Any attempt to bifurcate it in such a way that the least is treated as basic wages is arbitrary. In Surya Rashmi Ltd Vs Employees Provident Fund, Justice Sinha has stated: "The wage structure and the components of salary have been examined on facts, both by the authority and the appellate authority under the Act, which have arrived at a factual conclusion that allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution accordingly to the Provident Fund account of the employees."
Therefore, by bifurcating the salary, you will not gain anything. But when an employer is only bound to pay statutory wages, the minimum wages that the state has fixed, the employer can bifurcate the remuneration paid to his employees into two heads, i.e., basic wages which should be equal to or more than the minimum wages, and allowances of his choice.
From India, Kannur
There are unwritten practices adopted by HR professionals whereby they describe some elements of salary as 'allowances'. It is a system of showing the minimum amount as Basic Wages and showing the larger portion of the salary as allowances. This is just to reduce the statutory contributions towards PF, Bonus, Gratuity, etc. But there is no legal sanctity to this practice, and at the end of the day, the employer would be held responsible to pay the statutory contributions and payments on gross salary. It is true that allowances which are not fixed by amounts and are paid depending upon the category of employees, their place of posting, etc., are not part of the salary. But many HRs do not consider this rule but just keep the components as allowances out of the scope of wages.
Legally, whatever is earned by an employee is remuneration. Year on year, an employee is given an increase in salary. An increase in salary is given for two reasons: one, to compensate for the increase in the cost of living, and two, to reward his performance. The former is reflected by means of an increase in dearness allowance, and the latter is to be reflected in basic wages. Unfortunately, many private companies do not pay DA, and whatever increase is to be given will be added only under allowances. If this is brought to the appropriate authorities, then he will be able to establish very easily that allowances are not actually compensatory allowances but are part of wages only.
In order to avoid future confusions and risks, it is always good if you have a system of salary structure with basic salary, dearness allowance, and other allowances varying according to categories of employees and their place of posting. Moreover, the basic pay and dearness allowance should always be higher than the minimum wages notified by the state government. This will protect the employer to a certain extent.
In short, bifurcation is just an artificial arrangement. There are a lot of judgments which say that the total salary as per the contract of employment represents the wages as per law on which gratuity, PF, or other benefits should be calculated. Any attempt to bifurcate it in such a way that the least is treated as basic wages is arbitrary. In Surya Rashmi Ltd Vs Employees Provident Fund, Justice Sinha has stated: "The wage structure and the components of salary have been examined on facts, both by the authority and the appellate authority under the Act, which have arrived at a factual conclusion that allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution accordingly to the Provident Fund account of the employees."
Therefore, by bifurcating the salary, you will not gain anything. But when an employer is only bound to pay statutory wages, the minimum wages that the state has fixed, the employer can bifurcate the remuneration paid to his employees into two heads, i.e., basic wages which should be equal to or more than the minimum wages, and allowances of his choice.
From India, Kannur
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