PF to be calculated on all Allowances

Most of the companies have been calculating PF only on the Basic and DA wage components. HRA was already an exempted wage element. The wage elements for PF contribution are mentioned in Section 6: The contribution which shall be paid by the employer to the Fund shall be ten/ twelve per cent of the basic wages, dearness allowance and retaining allowance (if any).



The industry previously lacked consistency in the inclusion of ‘other’ allowances for calculating PF. Through the years the PF Authorities too did not insist hard upon the inclusion of difference types of wage element which did not fall under the Basic or DA category. With the wages skyrocketing the employer PF contribution of 13.61% (12% employer and 1.61% Administrative charges) started to prove to be costly. Needless to say the employers shifted the weight of the pay packets from the Basic and DA to the other wages elements.

Now the PF Authorities have woken up to this truth after being prompted by two independent rulings, by the Madras High Court and the Madhya Pradesh High Court, holding allowances (except HRA) paid by the employer to the employee to be part of basic wages.

This decision raises a question on whether is it the PF Authority who will decide on what and how a salaried employee has to save for his future. While this may be a welcome change for some but most would feel the pinch as their spending capacities would be crippled. This could also affect the salaried class who have invested in long term money saving schemes that involve premiums that cannot be stopped now as a result of their reduced take home pay.

The employers would be again be burdened with higher employer PF contributions and contributing to higher employee cost. Even in the present scenario the employer sees 25.61% of the wages being directed into the employees PF account and therefore this inclusion of ‘other’ wage elements would send the employers head spiralling!!

Present Legal Position

Special leave petitions including Appeal (Civil) No.(s) 8781-8782 filed by Surya Roshni & Others (dt.13-7-2012) pertaining to various allowances whether wages to attract employees provident fund contributions are pending for final disposal by the Supreme Court of India. The Employees’ Provident Fund Organization is a party to the appeals and very well aware that the subject matter is sub-judiced. Besides that on splitting of wages, the EPFO after losing the battle at four forms including Punjab & Haryana High Court (2011 Labour Law Reporter 943) has filed special leave petition which is also pending before the Supreme Court hence this part is also sub-judice.  Both the judgments of Madras and Madhya Pradesh High Courts have been stayed by Division Bench of Madras High Court and the Supreme Court respectively.


Union Labour and Employment Minister Mallikarjun Kharge on 13th December, 2012 said that the Circular November 30th, 2012 pertaining to Guidelines for Quasi-judicial proceedings under section 7A of the EPF&MP Act, 1952 issued by the EPFO on the inclusion of certain allowances etc. for calculating Provident Fund contribution is to be kept in abeyance. So the status quo will continue.

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One Response to “PF to be calculated on all Allowances”

  1. Almost all organizations interpret basic wages as the head of pay commonly called Basic, and DA, if any, and hence calculate PF contribution on Basic (plus DA). While organizations offer salary under heads of pay such as Conveyance, Travel Allowance, Medical Allowance, Other Allowance, and Special Allowance, such heads of pay are ignored for the purpose of PF calculation. The definition of salary for the purpose of PF calculation has been a subject of great debate mired in litigation over the years. While organizations argue that basic wages are nothing more than the head of pay called Basic, the PF department argues that basic wages is not just the Basic head of pay and should include other heads of pay such as Conveyance, Special Allowance etc. In addition, the PF department contends that the salary for the purpose of PF calculation cannot be lesser than the minimum wages as mandated by the Minimum Wages Act.