Increased contribution to provident fund to reduce take-home

The Employee Provident Fund Office (EPFO), which is under the Ministry of Labour and Employment, has issued a circular on November 30th 2012, which deals with the components of salary to be included while calculating PF contribution. While the circular is mainly aimed at employers who “split-up” basic salary of employees to reduce their contribution, this move will also reduce the take-home pay of a salaried individual. The Background:
Employee PF has been calculated by companies based on the employee’s basic salary and dearness allowance. The employee contributes 12% of his basic pay + dearness allowance towards his PF account, and the employer is obliged to contribute a similar amount. PF authorities claim that several employers follow the practice of “splitting” the basic salary into various allowances like medical allowance, education allowance, conveyance allowance, night allowance etc. on which PF need not be paid. This is to reduce the actual amount of basic salary eligible for PF computation, which in turn reduces the burden on the employers’ pockets. The PF office has thus issued this circular to regulate the calculation of PF and bring about a uniform definition of the term “basic salary”. 
What does the circular say?
The EPF Act specifies basic wages to include all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include-

1. the cash value of any food concession;
2. any dearness allowance that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living, house-rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment.

The Act thus specifies the components to be excluded from basic salary. Employers have conveniently broken the basic salary into various components and kept these components out of PF contribution. However, the circular issued on November 30th 2012 does not specify the allowances to be included in the basic pay. The circular specifies that “basic wages by its own definition encompasses all the payments except the specified exclusions. All such allowances which are ordinarily, necessarily and uniformly paid to the employees are to be treated as part of the basic wages”. As there is no clarity on the allowances to be included or excluded in the new circular, it is believed that an official clarification will be released by the Government on the same, this week.
Illustration:
X is a Government employee drawing the following components every month as salary:
Basic Salary: Rs. 20,000
Conveyance Allowance: Rs. 4,000
Medical Allowance: Rs. 5,000
Education Allowance: Rs. 3,000
Thus far, both X and his employer contribute 12% on the basic salary of Rs.20,000, ie: Rs. 2,400 each towards PF. Now, after this circular, X’s employer will have to include the other allowances, totalling Rs. 12,000 while calculating PF. X and his employer now contribute Rs. 3,840 each towards PF, an additional amount of Rs. 1,440. X’s pay slip will look as follows: