Special allowance to be part of your basic pay; here's how this impacts your take home salary

The spirit behind the SC judgement must be appreciated. In the absence of any state sponsored social security for the private sector, building a solid retirement corpus is the foundation of any good personal finance plan. The SC judgement clearly says that unless allowances beyond basic pay are variable in nature or linked to “any incentive for production” they must be treated as part of the total basic salary and not be “camouflaged” by the employer to avoid contribution towards PF. Great point & one that will ensure higher contribution to EPF and therefore a bigger commitment to your retirement security. However, critics will argue that this ruling reduces flexibility and there may be many people who don’t wish to lock in more of their hard earned money with the EPFO.

The SC judgment is likely to have far reaching consequences with respect to the salary structure that most organisations follow. An employee earning more than Rs 15,000 per month is not legally bound to be part of the EPFO and can technically tell the employer that they wish to opt out of the scheme. Not many organisations, however, at present offer such flexibilities. These requests may increase as the rules of engagement have now changed with the SC judgement. Employees may also want to avoid parking extra savings in EPFO which has a limited equity investment component, and may wish to opt for the National Pension Scheme Instead.

The operational details of the SC ruling are still awaited. And one also needs clarity on the timing of implementation. “We hope this order is not retrospective in nature as that will lead to a lot of chaos and confusion” says Preeti Chandrashekhar, Business Leader, Mercer India.

She adds that Basic Pay will now include all special allowances along with DA, but will most likely still exclude HRA, Bonuses, and any sales incentives or commissions paid out to the employee.

While the fine print will be revealed in the coming days, do get ready to take a long hard look at your salary slip. A trip to the HR department is probably in the offing.