Friday, September 30, 2011

Law Street in The Economic Times (September 2011)

Dear Readers,
Circulars keep getting issued by various regulatory agencies, some of which just add to the confusion. A case in point is what components of salary should be included for calculating your PF? True, a bigger PF means a better security blanket for the future (provided there are no hurdles in withdrawing it), but for now, it means a lesser take home pay. Read on, by clicking here, to know more.
Meanwhile, try and have a nice day.

PF: Perplexing fundamentals?

• Clarity in accounting for PF contributions is required
• Bonus does not form part of basic pay for computing PF
• Employees prefer a better take home pay and this must be kept in mind

One fine evening, during her recent trip to Bengaluru, Zenobia Aunty caught up with Gopal and his pals. “Provident fund (PF) issues,” are haunting us, Gopal stated after they had settled in a cosy corner of the local watering-hole. The mood among this group at the local pub was subdued. Not only were bonus payouts expected to be low owing to the depressing economy, but there was an underlying fear that a portion of their bonus would have to be taken into account for computing Provident Fund – the net result, a lower take home bonus.

“I was looking at paying off my home loan, with the bonus,” mourned Mohan. Gopal, on the other hand was thinking of a ski-vacation abroad. “Forget your bonus worries,” chipped in Shilpa. “Our monthly take home pay will be reduced as well, worry about that!” she added. The gloom deepened.

Zenobia Aunty, was still puzzled. What had changed in the PF spectrum that had anything to do with a lower take home pay-packet or a reduced bonus take home? After all, the rate of employer and employee contribution towards PF is 12 per cent of basic salary, dearness allowance and retaining allowance (if any). Further the motley trio were not ‘international workers’ – those who had been deputed abroad and had returned, which does lead to some more complexities. More on this in another column.
As mugs of beer continued to be downed, it seemed this trio was able to explain things better. Sometimes, beer does seem to clear the mind. It appeared that the PF officers were examining the records in some organizations to ensure that salary was not restructured in a way to reduce the PF contributions. This was a matter of concern, because who doesn’t want a better take home pay?

It all began with two recent judgements in favour of the PF department, which held certain allowances to be part of basic salary for computing the PF contributions. The judgement given by the Madras High Court included the following allowances to be part of basic salary for PF purposes, viz: conveyance, education, food concession, medical, special holiday, night shift and city compensatory allowances. That of the Madhya Pradesh High Court stated that conveyance/transportation allowance and special allowance fell within the ambit of basic pay.

Soon thereafter, the Employee Provident Fund Office began to issue internal circulars to the Regional PF Offices to follow these favourable rulings. The circulars also directed that the PF authorities have the power to examine and look into the employment contract, as well as the pay structure to determine whether the pay has been split into several headings (allowances) to help avoid PF contributions.
“Oh,oh, the crux of the problem is what constitutes basic wages,” exclaimed Zenobia Aunty, now understanding the magnitude of the problem. Her network is far and wide. A few phone calls to the experts, sorted out some issues.

There was good news for both Mohan and Gopal. Bonus cannot be included for the purpose of computing the PF contributions. Any payment by way of special incentive or work; payment based upon contingencies and uncertainties do not form part of basic salary. This has also been accepted earlier by the Supreme Court.

Both Mohan and Gopal obtained a bonus, which was a reward for hard work, given based on a performance rating. The better your performance rating, higher was the percentage of bonus payout. Further, the bonus payout did not depend on individual performance alone, but also on performance of the department and the team to which they belonged and the profits of their employer organisation.

Shilpa continued to sulk. She finished the entire bowl of chips, something she always did when worried. An extra hour on the treadmill is now called for, she sighed, even as she called for a refill.

Again, Zenobia Aunty, had good news to share, at least for Shilpa. Perhaps a position can be taken by the employer, based on Provisio to Paragraph 26A of the PF Scheme that the statutory limit under the EPF Act is restricted to 12 per cent of the monthly pay capped at Rs. 6,500 per month each, in respect of the employer and employee’s contributions.

Employer organizations, covered by the EPF Act, must ensure that the compensation or salary paid to an employee is true and correct and tallies across all records, be it pay-slips, salary register, books of accounts, TDS certificates etc and splitting up of the gross compensation into various allowances must not be carried out with the sole intent of reducing PF contribution (this would especially apply where the contribution is below the cap limits).

Meanwhile, Zenobia Aunty was also given to understand that a review petition has been filed before the Madhya Pradesh High Court and a writ appeal has been filed in the Madras High Court. Both should come up for hearing shortly and perhaps offer some clarity. Cheers to clarity!

Source of the image used.

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