EPF allowances: Clarification by Jan

Labour ministry appoints committee to draw up list of allowances that should be part of basic wages

The labour ministry has asked the Employees Provident Fund Organisation to keep into abeyance the implementation of a new rule that calls for clubbing various allowances into the basic wage, until a new list of such allowances are drawn up by next month.

The ministry has appointed a committee to look into the legal aspects and clearly prescribe what constitute part of the basic wage, a labour ministry official told FE.

"The circular can't be implemented unless we make sure it does not contradict what is mandated in the EPFO Act. We have given the committee a month's time to draw up a list of allowances that should be part of basic wages and those which has to be kept out," the official said.

Although the EPFO Act mandates that basic salary should include only basic wages, dearness allowance including the cash value of any food concession and retaining allowance, the EPFO recently issued a circular that adopted a Supreme Court order and said "all such allowances which are ordinarily, necessarily and uniformly paid to the employees are to be treated as part of the basic wages".

The employee has to contribute 12% of basic wages towards PF while employer makes a matching contribution up to the EPFO's basic wage limit of R6,500 per month. Most of the private companies include both the employees' and employer's PF contribution within the CTC.

The EPFO circular has created confusion on whether special allowances, transport allowance, medical, hostel and other allowances should be clubbed with the basic wage for PF calculations.

This has triggered fear that the net salary of employees may shrink due to higher PF contribution. It will also strain companies who decide to increase their PF contribution and raise the cost to the company (CTC) of employees.

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