Do you find the employee provident fund (EPF) as a hurdle in managing your money freely? If you don't appreciate the outgo towards this mandatory saving, there might be more pain ahead. You might 'lose' a bigger chunk of your salary if the Employee Provident Fund Organisation (EPFO) decides to expand the scope of salary for computing the EPF contribution.
According to a recent guideline issued by the central provident fund commissioner to the PF officials, "all such allowances which are ordinarily, necessarily and uniformly paid to the employees are to be treated as part of the basic wages". It means conveyance, transport and special allowances should be included in the salary for calculation of an employee's EPF contribution.
If the guideline covers all employees who are member of the EPFO and it becomes a law, you should be ready for a sharp decline in your take-home salary that you receive after deductions, including the EPF contribution.
Media reports alluded to a possibility of sharp cuts in the in-hand salaries of employees of member companies if the guideline becomes a law. After the confusion created by the news reports, the Union government has put the guideline on hold.
By law, 12 per cent of your basic salary is mandatorily deducted for contributions towards the EPF. Your employer is also required to make an equal contribution. The employer contribution, in most cases, is included in the cost-to-company or the gross salary of the employee.
However, this may not have any impact on those whose basic monthly salary is more than Rs 6,500. According to the Employee Provident Fund Act, contribution towards EPF is mandatory only for those whose basic salary is up to Rs 6,500. Tax and EPF experts say the guideline was issued in the interest of those whose monthly basic salary is within this range.
"It has been seen in the past that entities employing contract workers and small-wage earners often structure the salary of these employees in such a manner so as to minimise their PF liabilities. The guideline was issued to enforcement officials of the provident fund department to ensure action is being taken against erring entities," says a personal tax consultant on the condition of anonymity.
He further said the EPFO would not go after people whose basic salary is above Rs 6,500.
WHAT COURTS SAY
The courts of the country have passed similar orders in the past. The Madhya Pradesh High Court has observed that conveyance allowance and special allowance are paid 'ordinarily, necessarily and uniformly' to all employees and, hence, it should be part of the basic wage for calculation of the EPF contribution.
The Madras High Court has also said that any payment which is based upon contingency is not included in basic wages. However, merely labelling salary as various allowances does not give it the colour of contingent payment.
However, the Madhya Pradesh High Court's order has been challenged in the Supreme Court, which is yet to pronounce a judgement on the issue.
Divya Baweja, senior director, personal taxation, Deloitte Touche Tohmatsu India, said the matter is sub-judice and the recent internal guideline was meant to curb the practice of employers trying different tactics to avoid making EPF contributions.
What comprises salary for calculation of your employee provident fund (EPF) contribution...
> Basic salary
> Dearness allowance
> Conveyance allowance
> Special allowance
...and what do not impact your EPF contribution
> Over-time allowance
> Housing rent allowance
> Performance bonus
> Cash value of any food concession
> Gifts and presents