Implication of Supreme Court Ruling on PF

Implication of Supreme Court Ruling on PF


          Implication of Supreme Court Ruling on PF  

The Employee Provident Fund (EPF) is a scheme which was introduced by the government to give financial security to the employees of establishments under Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. In India, the Employee Provident Fund (EPF) is regulated by the Employees’ Provident Fund Organization (EPFO). Under this, it is mandatory for all the employees whose income is up to Rs 15,000 per month to contribute 12% of the “basic salary and dearness allowance”. Besides this, it is also mandatory for employers to make an equal PF contribution of 12%. While the contribution made by employer is divided into two parts, first is Employee Provident Fund (3.67%) and other is Employees’ Pension Scheme (8.33%).

At present, as per the Employees’ Provident Funds (Amendment) Scheme, 2014, employer and the employee both has to make equal contribution at the rate of 12 percent of the ‘monthly pay’ which includes basic wages, dearness allowance, cash value of food concession and retaining allowance.



Now, for the purpose of calculation of Employee Provident Fund (EPF) contribution, the Supreme Court of India held that special allowances shall be covered under the “basic salary” of employees. The main contention of the Supreme Court is to deduct EPF (Employee Provident Fund) on the “amount including allowances” instead of basic salary.

From now on, the special allowances will be taken into account for PF contribution under basic salary. On 28th February 2019, the Supreme Court passed a verdict that “under basic wages, special allowances will be considered such as conveyance, canteen, education, medical, special holidays etc and such other incentives”. There are few exceptions in case employer is able to demonstrate that such an allowance is liable to deduction or if the allowance is linked to any incentive.


Impact of Supreme Court Judgment on PF Contribution

As per the Supreme Court judgment, segregation of ‘special allowance’ from basic wages cannot be done for the purpose of deduction of Provident Fund. This judgment will have great impact on the companies as well as on the salary class people.


If your monthly pay is more than Rs. 15000, this judgment may not be binding. If your monthly pay is less than Rs. 15000, as almost all allowances now come under the definition of basic wages, there could be higher deduction to PF. This will reduce your take-home salary. But the good news is that the contribution (both employer and employee) to your retirement fund goes up.