About Statutory Compliances

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Change in PF contribution
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Dear All

Need some clarification on change in Employer & Employee contribution to PF:

Employer and employee is currently contributing 12% of basic into PF (basic being higher than Rs. 6500/-); and employee now wants to restrict his/her contribution now to only 12% of Rs. 6500/- basic, ie. Rs. 780/- pm. Example -- Current Basic on which PF contributions are made is Rs. 15000 = Employer's contribution to PF is Rs. 1800. This method was applied last 6-7 years. Now both employer and employees (existing) would like to change this contribution to Rs. 780 each (Basic Rs. 6500*12%). Can this change in contribution be done without changing employee's CTC?

Purpose behind this request is that the employee wants a higher take home package. [ He will get his the amount from his reduced PF deductions plus the employer's reduced contributions as increased take home (net) sal.]

What are the implications from a statutory standpoint to implementing this change?

Appreciate some inputs on this

Regards

Dear All,

As per statute the company is bound to pay PF contribution upto rs 6500/- but beyond the said amount it is absolutely company's discretion to pay or not to pay the matching amount. There are many companies who are paying PF contribution on basic +DA exceeding Rs 6500/-. It all depends on the Company. Since PF is a social security scheme and also keeping in view the financial distress a person might face at the old age most of the big MNCs pay the PF contribution on actual basic + DA.

Home > Provident Fund > PF contribution – company policy cannot overrule the law PF contribution – company policy cannot overrule the law
February 22, 2010 Gautham Leave a comment Go to comments
According to Section 6 of the Employees Provident Fund and Miscellaneous Provisions Act, 1952, the provident fund (PF) contribution is to be calculated as 12% of the sum of basic pay, dearness allowance, cash value of food concession and retaining allowance, if any, subject to a maximum of Rs 6,500 per month. Let us see how employer and employee PF contributions should be calculated. a. Rate of contribution: Should be 12%. The law allows a 10% contribution under specific conditions. However, for most organizations, the rate is 12%. b. Basis of calculation: The 12% rate should be applied on the basic pay, dearness allowance, cash value of food concession and retaining allowance, if any. What constitutes salary for the purpose of PF calculation is an interesting question by itself. There are many court judgments which clarify this. The 2008 judgment by the Supreme Court of India (Citation: CASE NO.: Appeal (civil) 1832 of 2004, PETITIONER: Manipal Academy of Higher Education, RESPONDENT: Provident Fund Commissioner, DATE OF JUDGMENT: 12/03/2008, BENCH: Hon’ble Dr. ARIJIT PASAYAT & Hon’ble P. SATHASIVAM) in which the court clarified that earned leave is not a part of basic salary for the purpose of PF computation, is a must read for payroll managers. The judgment specifies how Section 2b and Section 6 of the Employees Provident Fund and Miscellaneous Provisions Act should be read together in order to determine what constitutes salary. We can choose to ignore cash value of food concession and retaining allowance, since very few organizations provide those. In most cases, it safe to conclude that the 12% rate should be applied on the basic pay and dearness allowance, if any. The PF contributions can be calculated on either “full” basic (total basic pay paid to employees) or “restricted” basic (limited to basic pay amount of Rs 6,500 per month). Organizations in India should fully adopt the rate and the basis of calculation as specified in the law. However, we come across organizations which follow their own business rules — which are not in line with what the law mandates — for calculating...
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