Mar 182016

Wages and contributions

The Contents of section 2(b) of EPF & MP Act are as under:

“Basic Wages” means 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

  • The cash value of any food concession
  • Any dearness allowance (that is to say, all cash payment by whatever name called paid to an employee on account of a rise in cost of living),
    1. House rent allowance
    2. Overtime allowance
    3. Bonus
    4. Commission
    5. Or any other similar allowance payable to the employee in respect of his employment or work done in such employment
  • Any presents made by the employer

 Further, as per sec 6 of the act-

The contribution which shall be paid by the employer to the fund shall be ten percent of the basic wages, dearness allowance and retaining allowance for the time being payable to each of the employee.

Explanation 1 – For the purpose of this section, dearness allowance shall be deemed to include also the cash value of any food concession allowed to employee.

Explanation 2 – Retaining allowance means an allowance payable for the time being to an employee of any factory or other establishment during any period in which establishment is not working for retaining his service.

Thus, from the above it may be concluded that employers are liable to pay contribution on following sub heads of salary –

– Basic salary / wages
–  Dearness allowances
–  Cash value of food concession
–  Retaining allowances

 Further, following aspects shall be considered before calculating provident fund payable:

  1. The amount must be actually earned by employee while he is actually on duty.
  2. The amount must be paid to someone who was on duty.
  3. Must be payable to all employees of a concern in general and not few employees or group of employees of the concern
  4. Payment should not be ad-hoc payment.

The treatment of different components of salary under provident fund act is given below:

S. No. Components of salary Inclusion / Exclusion for calculation of contribution
1. Reward for good work in lieu of overtime Included
2. Extra leaf price is paid to workers in tea gardens over and above the normal daily wages for working beyond normal duty hours Included
3. Part of the wages given as time wage and another part as a piece rate wages Included
4. Arrears of wages with retrospective effect arising out of the award under ID Act Included
5. Ad-hoc lump sum interim payment pending the settlement of their demand for increase in wages Included
6. Transport allowance (Paid universally to all the employees) Included
7. Attendance incentive (Paid universally to all the employees) Included
8. Special allowance being paid to all employees Included
9. Housing and medical subsidies when employer fails to show that these subsidies were toward housing and medical facility Included
10. Leave Encashment Included
11. Payments made in lieu of notice for termination of service Excluded
12. Payments made u/s 33(2)(b) of Industrial Disputes act Excluded
13. Food concessions / discounts Excluded
14. House rent allowance Excluded
15. Overtime allowance Excluded
16. Bonus including production bonus Excluded
17. Commission Excluded
18. Food allowance given under settlement Excluded
19. Lump sum payment in lieu of arrears of revised wages and HRA under an agreement Excluded
20. Washing allowance Excluded
21. Commission to C&F agent Excluded
22. Lay off compensation Excluded
23. Employee terminated is reinstated and paid back wages Excluded