How Supreme Court ruling on PF may reduce your in-hand salary
A recent Supreme Court ruling in favour of the Employees' Provident Fund Organisation (EPFO) may impact your in-hand salary. According to the current EPF rule, employees contribute 12 percent of their basic salary towards the provident fund, with employers also contributing the same amount. The rest of the salary amount is added as various allowances such as special allowances, travel allowances and house rent allowance. The Supreme Court has ruled that employers must take special allowances into account while calculating their contribution to an employee’s PF.
A recent Supreme Court ruling in favour of the Employees' Provident Fund Organisation (EPFO) may impact your in-hand salary. According to the current EPF rule, employees contribute 12 percent of their basic salary towards the provident fund, with employers also contributing the same amount. The rest of the salary amount is added as various allowances such as special allowances, travel allowances and house rent allowance.
The Supreme Court has ruled that employers must take special allowances into account while calculating their contribution to an employee’s PF. The top court order said that such allowances are part of the total emoluments given to an employee and, therefore, the 12 percent EPF contribution should be calculated on this total amount.
Impact on salary
For example, if your basic salary is Rs 30,000, your PF contribution will be Rs 3,600 a month at the rate of 12 percent, while the equal amount is contributed by the employer each month.
In order to reduce the PF contribution, many employers add a special allowance component. So for example, if your employer is paying Rs 15,000 as basic pay and Rs 15,000 as special allowances, this will reduce your PF contribution to Rs 1800, which reduces the employer contribution as well.
Now after the SC ruling, the total PF contribution will be deducted from the special allowance as well. So instead of Rs 1,800 previously, you will have to contribute Rs 3,600 towards PF.
In most places, the employer's contribution to EPF is also a part of the employee's CTC. So, the extra Rs 1,800 of the employer's contribution will also be deducted from your in-hand salary.
So overall, if you are contributing Rs 3,600 per month towards the PF (1,800 your contribution and 1,800 your employers), after this ruling, the total PF contribution will rise to Rs 7,200 (3,600 your contribution and 3,600 your employers), reducing your net pay.
First Published: Mar 1, 2019 2:14 PM IST
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