Under Provident Fund (PF) regulations, PF is computed at 12% (for both the employer and employee contributions) against 'basic wages'.
Under Provident Fund (PF) regulations, PF is computed at 12% (for both the employer and employee contributions) against 'basic wages'. The minimum statutory limit against which such PF is to be computed is Rs 6,500 per month. The employer and employees have an option to make PF contributions on salary payments in excess of Rs 6,500 per month.
In those cases where contributions were made in excess of the statutory limit, the issue was whether an option is available to revert to lower levels of contributions (i.e.: a contribution computed against the statutory limit of Rs 6,500). The EPFO has now clarified on this issue.
"At times, junior employees are more interested in higher cash flows, as they want to buy a house and pay off the housing loans. Savings via higher PF contribution is not attractive to them," says an HR director of a Bangalore based software company. "Further varying court decisions on what constitutes basic wages for the purpose of PF contributions, added to the complexity," states a chartered accountant.According to EY India: "This circular is a welcome step, as it may allow an employer to limit PF contributions against Rs 6,500 per month where the contribution was earlier made on full monthly pay." "However, this option may not be available where there is an agreement with the employee to make contributions on full monthly pay," cautions EY.
In its newsletter, EY points out that this clarificatory circular stems from a ruling given by the Supreme Court (SC) in 2011. In the case of Marathwada Gramin Bank Karamchari & others, the apex court had held: Where the employer makes contributions towards the PF on pay in excess of the statutory ceiling limit, these may be discontinued at any time.
The SC had also held that an employer cannot be compelled to contribute on pay in excess of the statutory ceiling limit under the PF Law. The provisions of the PF law, which does not allow the employer to reduce an employee's PF benefits will only operate as a bar when there is an agreement with the employee to make contributions on full monthly pay.
The circular issued by the EPFO states that: The PF office will not challenge this order of the Supreme Court. EPFO has directed its offices to not force employers to contribution towards the PF on pay over and above the statutory ceiling limit. An option is available for employers and employees to contribute on salary beyond the statutory salary ceiling if they so desire, subject to approval from the PF office.
EY also points out that the Supreme Court ruling and the PF circular do not apply to 'international workers' (expatriate workers from India who are contributing to PF) as there is no statutory ceiling for them under the PF law.
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