India: "Test Of Universality" –Supreme Court Ruling On Calculation Of Provident Fund Contributions

Last Updated: 5 March 2019
Article by Meghna Sengupta

The Supreme Court of India has, in the case of The Regional Provident Fund Commissioner (II) West Bengal v. Vivekananda Vidyamandir and Others1, clarified the issue of the allowances to be excluded while calculating provident fund contribution.

The case is of significance for both employers and employees, in that it clarifies that all amounts, whether classified as "allowances" or not, if paid equally across the board to all employees, would be considered as "basic wage" for the purpose of calculation of PF contribution under Section 6 of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952 ("PF Act"). As a result, the amount of contribution to be made by the employer and employee towards PF will significantly increase, as most allowances will no longer be excluded from "basic wage". While this would result in a reduction of the salary in-hand received by the employee, the accumulation in the employees' PF account would increase.

Legal Provisions under Consideration

The PF Act defines "basic wage" under Section 2(b) as all emoluments paid in cash to an employee in accordance with the terms of his contract of employment. The definition of "basic wage" explicitly excludes cash value of food concessions, dearness allowance, house-rent allowance, overtime allowance, bonus, commission, presents made by the employer. Section 6 of the PF Act states that the contribution to PF shall be a percentage of the aggregate of basic wages, dearness allowance and retaining allowance (if any) payable to each of the employees. Currently the contribution rate is 12% for establishments with 20 or more employees, and 10% for establishments with less than 20 employees.

The case before the Supreme Court comprised five different appeals/transferred cases. The employer establishments and the regional PF commissioners were seeking to clarify whether certain allowances were to be excluded from the aggregate amount on which PF contribution under Section 6 of the PF Act is calculated.

The Supreme Court analysed the issue and concluded that, "The test adopted to determine if any payment was to be excluded from basic wage is that the payment under the scheme must have a direct access and linkage to the payment of such special allowance as not being common to all. The crucial test is one of universality" (emphasis added).

The Supreme Court relied on earlier decisions where similar issues had arisen for consideration. In Bridge and Roof Co. (India) Ltd. v. Union of India,2 the Supreme Court had held that the basis for inclusion of dearness allowance in Section 6 and its exclusion in Section 2(b), is that whatever is payable in all concerns and is earned by all permanent employees is included for the purpose of contribution under Section 6, but whatever is not payable by all concerns or may not be earned by all employees of a concern is excluded. The principles in Bridge Roof were reiterated in Manipal Academy of Higher Education v. Provident Fund Commissioner.3

Further, the term "basic wages" was interpreted in Muir Mills Co. Ltd., Kanpur v. Its Workmen,4 where it was held that any earning which may vary from individual to individual according to their efficiency and diligence would stand excluded from the term "basic wages". The term "basic wages" was further discussed in Kichha Sugar Co. Ltd. v. Tarai Chini Mill Majdoor Union, Uttarakhand,5 which held that wages which are universally, necessarily and ordinarily paid to all the employees across the board are "basic wages". Where the payment is available to those who avail an opportunity more than others, the amount paid for that cannot be included as part of "basic wages".

Keeping the above decisions in mind, the Supreme Court in the present case concluded that none of the establishments have demonstrated that the allowances in question being paid to their employees were variable or were linked to any incentive resulting in greater output by an employee. Neither were these allowances in question shown to not have been paid across the board to all employees in a particular category. In order for an allowance to be excluded from "basic wages" it has to be shown that the workman concerned had become eligible to get this extra amount beyond the normal work which he was otherwise required to put in.

The Supreme Court concurred with the regional PF commissioners, who had concluded in each of the instances concerned, that the allowances were essentially part of basic wages and had been camouflaged as part of an allowance to avoid deduction of PF contribution. The Supreme Court therefore explained that in accordance with the test of universality, they formed part of the basic wage and had to be factored in while making PF contribution.


1. Civil Appeal No. 6221 of 2011 (February 28, 2019)

2. (1963) 3 SCR 978

3. (2008) 5 SCC 428

4. AIR 1960 SC 985

5. (2014) 4 SCC 37

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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