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EPFO tightens deduction loophole

December 12, 2012 10:34 IST

The flexibility exercised by employers and also the provident fund authorities in the definition of basic wages has finally caught the attention of the Employees Provident Fund Organisation (EPFO).

It has sought to clarify the definition of basic wages, based on which the PF is calculated. Their re-definition seeks to include other allowances made by employers under sundry heads to ensure the basic wage remains small.

The clarification is meant to help workers get higher PF contributions from employers, PF officials said, adding only a formal amendment in the EPFO Act can ensure that allowances do not eat into basic wages.

Workers pay 12 per cent of their basic wages as PF and employers are obliged to pay a matching contribution. The clarification circular was issued by the Central PF Commissioner on November 30.

The clarification, titled 'Splitting of wages', says the basic wage "encompasses all the payments except the specified exclusions. All such allowances which are ordinarily, necessarily and uniformly paid to the employees are to be treated as part of the basic wages."

In the EPFO Act, the PF does not cover certain "specified exclusions'' like cash value of any food concession; any dearness allowance ... all cash payments by whatever name called paid to an employee on account of a rise in the cost of living, house-rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment''

The circular, however, does not specify any criterion for identifying those allowances, which are not excluded from PF. A senior EPFO official said the clarification was just a reiteration of what the EPF Act says and is meant to stop the exploitation of workers by employers.

It is meant to minimise the discretion that is now exercised by employers and PF officials in calculating the PF contributions to be deducted from workers.

He said the splitting of wages has kept a lot of workers outside the social security cover of PF. Since only those drawing up to Rs 6,500 a month are covered under PF, the basic wage is often split to show the bulk of the amount to be house rent allowance or some other payment on which PF need not be given, says the official.

The law itself does not provide an exhaustive list of allowances on which PF cannot be or can be calculated, he says, which is why it needs to be formally amended to stop the distortion (see box 'How EPFO Act defines basic wages').

A D Nagpal, representative of trade unions in the Central Board of Trustees of the EPFO, said a committee formed to suggest amendments to the Act had said the minimum wage should be fixed as a basic and any allowances should be beside this amount.

At present, if the basic salary is, for example, Rs 5,600 a month, the employer might show the house rent allowance as Rs 3,500 or even more.

Since HRA is excluded from PF, the worker's PF contribution would be tiny, and that helps the employer, who has to pay only a small amount as matching contribution, he explains.

B P Pant, director, labour and employment, in the Federation of Indian Chambers of Commerce and Industry agrees the minimum wage should be fixed as a basic wage to stop unfair distortions of the law by employers. The clarification by the PF authorities helps in bringing some clarity to the law, he said.

BS Reporter in New Delhi
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