JUDICIARY WATCH

SC ruling will slash your take home pay if your basic salary is less than Rs 15000 pm: Here's why

Staff reporter, New Delhi
13/03/2019   0 Comments

The recent Supreme Court decision on what constitutes wages for the purpose of Provident Fund (PF) contributions has far reaching consequences on the industry at large as well on your take home pay. The Supreme Court has ruled on 28 February, 2019 in favour of the Regional Provident Fund Commissioners by concluding that allowances in question such as special, conveyance, education, canteen, medical, etc, paid to employees, are required to be treated as wages for the purpose of PF unless such payments are: "Variable in nature, or are linked to incentives for production resulting in greater output by the employee; "Not paid across the board to all employees in a particular category; "Being paid especially to those who avail the opportunity. 

Now that the SC has defined the meaning of wages for the purpose of calculating PF contribution from your salary as well as matching contribution from the employer's side, the question arises how this decision is going to impact your take home salary. This decision is likely to impact only those domestic workers whose basic salary is or was (at an earlier point in time) less than Rs 15,000. To explain this impact, let us take a case study where an individual is earning Rs 20,000 per month, having a basic pay of Rs 8,000 per month. Due to change in the meaning of wages, your monthly take home pay is likely to be reduced by Rs 1,332 per month. However, on the other hand, your PF contribution will be increased by Rs 1, 332. This hike is inclusive of employer's contribution made to the EPF account. 

Remember, HRA is specifically excluded under the Employees' Provident Fund (EPF) Act, 1952. Why the controversy arose. The Supreme Court decision came on the backdrop of the salary structure which is generally followed across industries and employers. Employers typically follow a certain salary structure. The total of all emoluments and benefits provided by the company to its employee is generally termed as Cost to the Company (CTC). CTC is broken down into Basic Pay, House Rent Allowance (HRA), Retirement benefits (such as employer contribution to PF, Gratuity accruals and a basket of tax-friendly allowances which are termed as Flexible Benefits (FBs). The FBs may include allowances or reimbursements relating to children's education, conveyance (travel or running and maintenance expenses of vehicles), medical, leave travel concessions, meal, telephone expenses etc. 

Generally, employees choose the components of pay that are tax-friendly for him/her. The remaining amount under FBP was paid out as a Special Allowance (SA) (or termed as personal pay, residual pay, year-end pay etc). Variable pay or bonuses were also considered as part of the CTC by some companies. The employer understanding of the definition of wages excluded components such as HRA, Bonus, or any other similar allowances, therefore, companies were remitting PF on just one component of the salary structure, i.e., Basic Pay. HRA is specifically excluded as mentioned above and any other allowance for a specific purpose such as conveyance, medical, leave travel etc, would be covered by the exclusion provided, i.e., "any other similar allowance" and hence excluded.

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