Take home pay packet to see an overhaul with Supreme Court ruling

Employees’ Provident Fund found out that a large number of firms were splitting their employees’ pay packages into numerous allowances to reduce their EPF liability.
(Express Illustration)
(Express Illustration)

NEW DELHI: If you are a salaried employee, expect your employer to soon rejig your salary slabs differently. This is not unlikely, with the Supreme Court last week holding that special allowance is part of one’s basic wages and that they should be included while calculating the Employees’ Provident Fund (EPF). 

The court was hearing a number of appeals seeking clarity over whether “the special allowances paid by an establishment to its employees would fall within the expression ‘basic wages’ under Section 2(b)(ii), read with Section 6 of the Act for computation of deduction towards Provident Fund”.

Earlier, the Employees’ Provident Fund Organisation (EPFO) had already conducted a study and found out that a large number of firms were splitting their employees’ pay packages into numerous allowances to reduce their EPF liability. The employers had been convincing their workers that this would result in higher take-home pay. The matter then went to court.

However, after the hearing, the two-judge bench comprising Justices Arun Mishra and Naveen Sinha ruled that employers cannot segregate “special allowance” from “basic wages” for purpose of Provident Fund deductions.

Personal finance experts claim that after the Supreme Court hearing, employers would be forced to contribute higher to PF. “The order is very relevant in terms of PF deduction. While employers were able to pay taxes on special allowances, they were able to keep PF at low by increasing the amount paid under the special tax. Now, they have to either increase the EPF or they have to readjust the whole salary slab,” said Ramesh Vyas, a personal finance expert with HDFC Bank.

However, this may also mean that your take-home salary would be lower. “The Supreme Court judgment is good in terms of adding more to the PF saving. However, it may mean a lower take-home salary. It would be interesting to see how HR professionals are going to rework the salary slab in the coming months,” Vyas added.

Meanwhile, EPFO has decided to take stringent action against those firms that will not take into account such components in PF contributions. The retirement fund body is studying the judgment, and is expected to come out with a detailed plan to implement the judgment and guidelines in this regard, in a few days. 

“We welcome the court’s decision. This is a long-pending issue. In fact, the EPFO’s apex decision-making body, Central Board of Trustees, had constituted a committee to give a detailed report and suggestions to deal with the splitting of wages by employers for reducing EPF liability,” said Virjesh Upadhyay, an EPFO trustee, who is also general secretary of Bharatiya Mazdoor Sangh. 

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