The report above is Aon's Point of View on Supreme Court Judgement and Market Survey. To learn more, download the full report.
- In a landmark judgement, The Supreme Court of India ruled that special allowances which are universally, ordinarily and necessarily paid to employees would be considered as basic wages in calculating Provident Fund (PF) contributions.
- In India, it is a typical market practice to split the gross salary into basic pay and several other allowances. The basic salary is typically upto 50% of gross salary and the balance includes various other tax efficient allowances. Any balancing components are usually termed as Special, Flexible or Supplementary allowances.
- Section 2 (b) of the PF Act defined "basic wages" to be all emoluments which are earned by an employee as per the terms of the contract of employment but does not include:
- the cash value of any food concession;
- any dearness allowance, house-rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment
- any presents made by the employer;
- Employers in India have been calculating statutory PF contributions only on the basic salary and not on other allowances as they assumed the phrase “similar allowance” implies all types of allowances within the compensation structure are not basic wages and hence outside the purview of PF wages
- However, The Supreme Court concluded that “allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution accordingly to the provident fund”.
- The judgement indicates that if an employer intends to remove any allowances from the definition of PF wages, it must be proved that such allowances were
- linked to production or overtime,
- not paid to all employees or category of employees and
- are paid only to those who avail the opportunities.
- In view of the above, Aon conducted a quick pulse survey to understand how organizations plan to implement and manage the above changes with respect to PF.
- The survey results along with Aon’s Point of View would help participants understand the actions undertaken by organizations on the same topic which in turn would help them in reviewing their own PF and related compensation structuring policy
- A detailed newsletter along with Aon POV is also posted at http://aonhewitt.co.in/Home/Hottopics/Important-changes-impacting-Provident-Fund
To learn more, download the full report above.
The report presents results of our pulse market survey conducted to understand actions undertaken by employers in India in response to recent Court judgements related to the statutory Provident Fund scheme. Aon does not practice legal advisory and the information is limited to the analysis of survey responses and our Point of View. Accordingly, readers should consult with their professional advisors as appropriate whenever legal advice is needed prior to taking any action.