New Provident Fund rule makes special allowances part of basic salary

The Supreme Court ruled has ruled that employers must consider special allowances paid to the employees as a part of the "basic wage" for deduction towards provident fund.  As per the new provident fund rules, both employer and the employee pay 12 per cent of basic wages each towards contribution to EPF.

The top court had rules that special allowance is part of the basic wages for computing the employees provident fund (EPF).
The Supreme Court decision came when it was dealing with a question on whether special allowances paid by an establishment to its employees would fall within the expression "basic wages" under the provision of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952 for computation of deduction towards provident fund, news agency. 
Accordingly, the Employees Provident Fund Organisation (EPFO) will take stringent action against firms not factoring special allowance for EPF computation 
Both employer and the employee pay 12 per cent of basic wages each towards contribution to EPF. "Following the judgement, the EPFO will take stringent action against firms which would not factor in special allowance for computation of EPF contributions. The body is studying the judgement and would soon come out with a detailed plan to implement the judgement," PTI quoted a source privy to the development as saying.
"The case of artificially lowering basic wages which become the basis for computation of EPF contributions," the EPFO stated in the apex court. Thus, it is imperative for the body to implement this in letter and spirit," it added.
EPFO trustee Virjesh Upadhyay, who is also general secretary of Bharatiya Mazdoor Sangh (BMS) said, "We welcome the apex court 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 splitting of wages by employers for reducing EPF liability."
"The committee had given its recommendation to deal with the issue. But in the meantime, the matter went to court and recommendations given by the panel to include various allowance into basic wage could not be implemented," he further said, EPFO had found in a survey earlier that scores of employers were splitting their employees pay packages into numerous allowances to reduce their EPF liability.
For employees with monthly pay of less than Rs15,000, however, inclusion of all allowances in wages for PF calculation would result in a lower take-home salary. Monthly pay comprises basic wages, dearness allowance, cash value of food concession and retaining allowance, if any.