Special Allowances Part Of Basic Wage, Provident Fund Calculation: Supreme Court

Special allowances given to employees, besides dearness allowance, retaining allowance and cash value of any food concession, will fall under ‘basic wage' for calculation of provident fund contributions, the Supreme Court ruled.

A two-judge bench of Justices Arun Mishra and Navin Sinha, in their verdict on Feb. 28, held that special allowances such as conveyance, canteen, education, medical, management and city compensatory allowances, special holidays and night shift incentives will be included as part of the basic wages liable to deduction unless the employer is able to demonstrate that such an allowance is:

• Linked to any incentive for production resulting in greater output by an employee; or
• Not paid across the board to all employees in a particular category; or
• Being paid especially to those who avail the opportunity.

As of now, the provident fund contribution, as per the Employees' Provident Funds (Amendment) Scheme, 2014, is paid equally by the employer and the employee at 12 percent of the ‘monthly pay' which constitutes—basic wages, dearness allowance, cash value of food concession and retaining allowance.

Passing a combined judgment on five civil lawsuits, the apex court ruled in the favour of Provident Fund Authority on the grounds that the allowances in question were essentially part of the basic wage camouflaged as an allowance to avoid deduction and contribution to the provident fund account.

The judgement is silent on a provision that makes provident fund contribution compulsory for those earning a basic salary on up to Rs 15,000 at the time of joining a company. For such employees, the contribution remains the same for the rest of their tenure even if their basic wage increases at a later stage. Those with a basic pay of more than Rs 15,000 at the time of their joining can choose not to contribute to the provident fund and can limit their contribution on a minimum of Rs 15,000.

“The ruling will impact those who earn a basic salary of less than Rs. 15,000 such as domestic workers, freshers and junior staff, as their allowances will be counted as basic wages, increasing their PF contribution on up to Rs 15,000,” said Puneet Gupta, tax director, People Advisory Services, EY India. International workers in India will also face a higher PF contribution as the limit of Rs 15,000 for compulsory deduction is not available to them, he said.

Ishita Sengupta, partner-personal tax at PwC India, said the ruling delves into the substance of components of pay rather than just the nomenclature by relying on factual justification for each allowance to determine what should constitute basic wages. “There will still be some subjectivity on which specific allowances may not be included as part of basic wage. So, one will have to go by the nature of the payment and the reason why it has been paid.”