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Good News For Employers: Cap On PF Contribution

Published on Thu, Jun 12,2014 | 16:10, Updated at Thu, Jun 12 at 16:23Source : CNBC-TV18 

A recent circular dated 27 May, 2014 introduced by the Employees Provident Fund Organisation (EPFO) which comes under the Ministry of Labour and Employment, has clarified that an employer cannot be forced to contribute towards Provident Fund beyond the statutory ceiling (presently, INR 6,500 per month) as specified under the provident fund law / regulations[1].

The circular is only clarificatory in nature and makes a reference to a ruling of the Apex Court (i.e. the Supreme Court) in 2011 in the case of Marathwada Gramin Bank Karamchari Sanghatana vs. Management of Gramin Bank where it was held that where the employer was making contributions towards the provident fund (PF)  for the employees in excess of the statutory obligation under the PF law (in meticulously complying with provisions of its own scheme), these may be discontinued at any point of time. It was also held that the employer cannot be compelled to contribute in excess of its statutory ceiling under the PF law and that the provisions of the PF law which does not allow the employer to reduce employee's PF benefits, will only operate as a bar where there is agreement with the employee to contribute on full monthly pay.

It is very important for all employers to review the pros and cons of this circular to decide on the applicability of the same to their organization. The circular would help to eradicate / reduce the huge accumulated losses suffered by the employer (especially in scenarios where employers are bankrupt / insolvent but still contributing to PF in excess of statutory ceiling limit).

On the flip side, the PF circular is not applicable to International Workers as there is no statutory ceiling applicable to them under the PF law. Also, it is important to note that the option to limit the contribution on INR 6,500 per month may not be available where there is an agreement with the employee to contribute on full monthly pay.

Under the current practice of contribution to Provident Fund, both the employees and the employers' contribution are computed @12 per cent of basic wages. However, as per the PF law, the following factors are essential for an employee covered under the PF:

- The employer and employee are statutorily required to contribute on INR 6,500 per month

- The employer and employee have an option to contribute on monthly pay in excess of INR 6,500 per month

- The employer is not allowed to reduce the PF benefit to which the employee is entitled to under the terms of his/ her employment, express or implied

Thus, where the employee can continue contribution to PF on full monthly pay i.e. an amount higher than INR 6,500, the employer cannot be forced to make a matching contribution to PF. The employer can limit its contribution to INR 780 i.e. 12% of INR 6,500, even if earlier the contribution was paid on full monthly pay (i.e. assuming the contribution was done earlier on an amount in excess of the statutory limit prescribed under the PF law).

Before the introduction of the EPFO circular, clarifying the components forming part of basic wages, the employers used to structure the salary in such a way that the basic wages were restricted to INR 6,500 and the balance pay used to be paid in the form of other allowances/benefits, in order to reduce the employer's contribution on INR 6,500. In order to discourage this practice, EPFO constantly came with clarifications regarding the definition of basic wages, so as to ensure retirement security of the employees. However, the above circular also puts an end to the confusion arising out of the definition of basic wages.

The 2011 Supreme Court ruling and the PF circular are not applicable for 'International Workers' as there is no statutory ceiling applicable to them under the PF law.

The employers and their employees may opt to take advantage of the 2011 Supreme Court ruling and the circular. In such cases, it is essential that the terms of employment with the employees and the other facts are analysed to determine the applicability of the said ruling and the circular. Considering the directive of the EPFO to all Regional Provident Fund Offices - this circular is a welcome step and should be looked into with particular interest by all organizations who are currently contributing to provident fund in excess of the statutory ceiling limit as prescribed under the PF Law.

(Views expressed are personal)

[1] The Employees Provident Fund and Miscellaneous Provisions Act, 1952 ('the EPF Act') and the Employees Provident Fund Scheme, 1952 ('the EPF Scheme') 


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