The good news first: your retirement corpus just got a boost from the Supreme Court (SC). The bad news? Your monthly take home is likely to fall.
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SC has ruled that employers must take special allowances into account while calculating their contribution to an employee’s Provident Fund Account. As per rules of the Employee Provident Fund Act, an employee contributes 12 percent of their basic pay to their respective EPF accounts with the employer matching this with its own 12 percent contribution. The employer’s contribution is part of the total CTC or cost to company. Now, in order to make the pay structure more ‘friendly” (read more money every month in the employee’s hand), many organisations split the monthly emoluments under separate heads which included basic pay and a special allowance or ‘residuary choice pay’.
The SC order says special allowance is nothing but part of the total emoluments given to an employee and therefore the 12 percent EPF contribution should be calculated on this total amount.
The immediate impact of this implies a higher PF outgo from your monthly paycheck and lesser money in hand. For example, if an employee’s basic salary was Rs 5000 and Special Allowances was Rs 10,000, then in the existing framework, only Rs 600 would get deducted from the take home salary as contribution to PF. In the new scheme of things, however, the entire Rs 15,000 will be treated as basic salary and Rs 1800 will be deducted as contribution towards the employee provident fund.
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.
