Basic Wage is defined under Section 2 (b ) of the Employees’ Provident Fund & Miscellaneous Provisions Act, 1952  as all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in accordance with the terms of the contract of employment which are paid or payable in cash but does not include the cash value of any food concession, any dearness allowance ( that is to say all cash payments by whatever name called paid to an employee on account of cost of living), house rent allowance, overtime allowance, bonus, any commission or similar allowance payable to an employee in respect of his employment or of work done in such employment and any presents made by the employer.

However, the exception given to dearness allowance is corrected by including it in Section 6 for the purpose of contribution. Similarly, explanation 1 under Section 6 says dearness allowance shall be deemed to include also the cash value of any food concession allowed to employee by which exemption given under Section 2(b) is corrected under Section 6. As such any subsidy given on food provided in canteen or lunch coupons in lieu of canteen food or food allowance will also attract PF contribution. In practice, it may not be happening.

While overtime allowance is exempted, any allowance received for extra work done on time it is not considered   as overtime vide Amal Kumar Ghatak v. Regional Provident Fund Commissioner and Others, 1980-II-LLJ-308 (Cal). Good work allowance  or reward done during extra hours is also not considered as overtime since it has not been consider in the nature of overtime vide D.C.M. Limited v. Regional Provident Fund Commissioner, 198 –I- LLJ-979 (Raj).

Since the word ‘bonus’ is used without any qualification, it covers every kind of bonus paid to employees which is excluded from basic wage. Any incentive paid under an incentive scheme in pursuance of the settlement reached is an incentive bonus or production bonus in the nature of reward for labour not arising out of contract of employment but depending upon the excess production over and above the norms specified. As such incentive bonus and production bonus are excluded form basic wage under Section2(b) vide Greysham &Co. v The Regional Provident Fund Commissioner, New Delhi, 1978-II-LLJ-95 (Del).

A full bench of Supreme Court in the case of Bridge and Roof Company (India) Limited v. Union of India and Others held that bonus of all kinds are excluded from the definition of term ‘basic wages’. 1962-II-LLJ-490 (SC)(FB)

But in some instances the PF Inspectors remarked in the inspection books that ‘special allowance’ paid to employees are to be covered under basic wage attracting contribution to be paid. Usually, this type of ‘special allowance’ or any similar name is provided in pay structure to adjust the amount which is not fitting into the salary structure and it will be a regular payment constituting payment in terms of contract of employment. In case of unionized employees such components will arise in wage settlements which are also constitute payment in terms of contract of employment. Therefore, such ‘special allowances’ paid are covered under the definition of basic wage and contributions have to be paid on such allowances. But in practice PF contributions are not paid on ‘special allowances’ generally due to misinterpretation to avoid employers’ liability to lessen the cost. However, any special allowance which is not paid under any contract of employment, settlement or award purely out of employer’s own will and pleasure will not form part of wage as held by Madras High Court in the case of R. Ramanathan Chettiar Jewellers, Madurai v. Regional Commissioner, Employees’ Provident Fund, Madurai, 1988-II-LLJ-945.  

Now, Madras High Courts has delivered judgment that conveyance, educational allowance, food concessions, medical, special holidays, night shift incentives and city compensatory allowances attract PF contributions as they fall under the definition of ‘basic wages’ under Section 2(b). Similarly, Madhya Pradesh High court held that conveyance allowance and special allowance to be included in ‘basic wages’ quoting Supreme Court judgment in the case of Manipal Academy of Higher Education v. Provident Fund Commissioner (2008) 5 SCC 428 .

The current status of both the cases is that the petitioners have filed revision petitions  before respective High Courts and we have to wait and see the outcome.

In the meanwhile EPFO has issued circular to all its field offices to utilise the above judgments as per merits of the case as and when similar situation arises.

This circular may lead to PF Inspectors in other States writing comments in the Inspection Book saying that such and such allowances are not covered to pay PF contributions which may lead to enquiries under Section 7A, appeals before Tribunal under Section 7B and thereafter filing writ petitions before High Courts and Supreme Court.



07/26/2011 20:49

dear sir:

thanks a lot for valuable inputs

i have a querry that if an employees earns 15000/- basic salary and as per EPF regulation, only 12% of wage ceiling 6500 is need to be contributed.

no need to contribute over & above wage ceiling 6500, which whatever allowance employee may earn

other way round if all earnings including allowance is less than wage ceiling rs.6500/- then entire earnings (gross) entitle for pf deduction

is that correct interpretation

07/28/2011 03:52

Dear sir,

Can you also feed in your blog about the statutory requirements for the IT/ITeS company.

07/30/2011 08:02

Dear Dinesh,

As of date "basic wages" under PF Act is taken as Basic Salary plus DA covering under PF Act up to Rs 6500/- per month. The excluded employees drawing more than Rs 6500/- per month may also become members of PF through a joint request of employee and employer. When the organization covers employees drawing more than Rs 6500/- per month why think of paying only 12% PF contribution up to only Rs 6500/-? In my opinion it will be a myopic view. Once an excluded employee drawing "basic wages" more than Rs 6500/- per month is covered under PF, his contributions will be on such higher amount of "basic wages" over and above Rs 6500/-.

Other alternative is to create a separate PF for the excluded employees (those drawing "basic wages" more than Rs 6500/-) not covered under PF Act and take exemption under Income Tax Act in which case there will be certain conditions imposed by the authorities of Income Tax wherein if the amount standing to the account of member of such PF is withdrawn within the lock-in period will be taxable.

07/11/2012 17:19

Appreciate your details

07/15/2012 11:13

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07/17/2012 12:19

Its fantastic as your other posts : D, appreciate it for putting up.

swapnil hiwrale
12/08/2012 23:23

tnaku sir


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