SC ruling will slash your take home pay if your basic salary is less than Rs 15000 pm: Here's why

The Supreme Court's decision is likely to impact those domestic workers whose basic salary is or was (at an earlier point in time) less than Rs 15,000.

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This could reduce take home pay and impact employees at lower pay levels, but their PF benefits get accumulated at higher amounts.
By Saraswathi Kasturirangan and Sumit Jain

The recent Supreme Court decision on what constitutes wages for the purpose of Provident Fund (PF) contributions has far reaching consequences on the industry at large as well on your take home pay.

The Supreme Court has ruled on 28 February, 2019 in favour of the Regional Provident Fund Commissioners by concluding that allowances in question such as special, conveyance, education, canteen, medical, etc, paid to employees, are required to be treated as wages for the purpose of PF unless such payments are:

"Variable in nature, or are linked to incentives for production resulting in greater output by the employee;
"Not paid across the board to all employees in a particular category;
"Being paid especially to those who avail the opportunity.

Now that the SC has defined the meaning of wages for the purpose of calculating PF contribution from your salary as well as matching contribution from the employer's side, the question arises how this decision is going to impact your take home salary. This decision is likely to impact only those domestic workers whose basic salary is or was (at an earlier point in time) less than Rs 15,000.

To explain this impact, let us take a case study where an individual is earning Rs 20,000 per month, having a basic pay of Rs 8,000 per month.

Potential impact of Supreme Court Ruling on wages for PF on domestic worker with CTC of Rs. 20000 pm
Breakdown of CTC PF paid on Basic Pay PF on all components of Pay, limited to Rs. 15000 pm
Basic Pay 40% of CTC 8000 8000
HRA 40% of basic 3200 3200
Children education allowance 200 200
Conveyance 1600 1600
Medical allowance 1250 1250
Special allowance 3830 2498
PF 24% ( Employer and employee)** 1920 3252
Total monthly CTC 20000 20000
Take home pay ( CTC less PF contribution) 18080 16748
Reduction in take home pay per month 1332
Gratuity and bonuses not considered as part of CTC

Due to change in the meaning of wages, your monthly take home pay is likely to be reduced by Rs 1,332 per month. However, on the other hand, your PF contribution will be increased by Rs 1, 332. This hike is inclusive of employer's contribution made to the EPF account.

Remember, HRA is specifically excluded under the Employees' Provident Fund (EPF) Act, 1952. Why the controversy arose
The Supreme Court decision came on the backdrop of the salary structure which is generally followed across industries and employers. Employers typically follow a certain salary structure. The total of all emoluments and benefits provided by the company to its employee is generally termed as Cost to the Company (CTC).

CTC is broken down into Basic Pay, House Rent Allowance (HRA), Retirement benefits (such as employer contribution to PF, Gratuity accruals and a basket of tax-friendly allowances which are termed as Flexible Benefits (FBs).

The FBs may include allowances or reimbursements relating to children's education, conveyance (travel or running and maintenance expenses of vehicles), medical, leave travel concessions, meal, telephone expenses etc.

Generally, employees choose the components of pay that are tax-friendly for him/her. The remaining amount under FBP was paid out as a Special Allowance (SA) (or termed as personal pay, residual pay, year-end pay etc). Variable pay or bonuses were also considered as part of the CTC by some companies.

The employer understanding of the definition of wages excluded components such as HRA, Bonus, or any other similar allowances, therefore, companies were remitting PF on just one component of the salary structure, i.e., Basic Pay. HRA is specifically excluded as mentioned above and any other allowance for a specific purpose such as conveyance, medical, leave travel etc, would be covered by the exclusion provided, i.e., "any other similar allowance" and hence excluded.

What the law says regarding EPF
Establishments with 20 or more workers are mandatorily covered under PF. Such establishments shall remit 24 percent of PF wages on a month-on-month basis, out of which 12 percent shall be recovered from the employees. However, employees with PF wages exceeding the prescribed wage ceiling (Rs 15,000) at the point of initial membership may be treated as excluded employees.

Since the SC has dismissed all appeals thereby concluding that the allowances in question paid to employees are subject to PF, employers are required to review their PF contributions. This could significantly reduce the take home pay and impact employees at lower pay levels, while of course, their PF retirement benefits get accumulated at higher amounts. Employers will be required to retrospectively contribute on higher wages, impacting their cash flows and profitability.

(The authors are Saraswathi Kasturirangan,Partner, and Sumit Jain, Manager, Deloitte Haskins & Sells, LLP)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of
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