News Flash

In a long-awaited ruling, the Supreme Court has vide order dated 28 February 2019, taken the view that universally paid allowances would be treated as part of 'basic wages' for the purpose of provident fund (PF) payments. This common order was passed today in relation to several appeals on this issue that were pending before the Supreme Court, in the cases of Surya Roshni Ltd., etc. This ruling can have a significant financial impact on organisations, since it lays to rest a long-standing controversy as to which components of pay are amenable to PF contributions. Organisations are required to deposit 12% of an employee's basic wages, dearness allowance and retaining allowance towards PF, and employees make an equal contribution through a payroll deduction.

While a more detailed analysis of the ruling and its implications will follow (including whether allowances like House Rent Allowance are amenable to PF as well), in essence, the Supreme Court has upheld the principles laid out in the earlier case of Bridge and Roof Co. (India) Ltd. vs. Union of India. The Bridge and Roof case had observed that all universal allowances should be treated as part of 'basic wages', and hence should be subject to PF contributions.

This judgment gives the provident fund department renewed strength to scrutinize the allowances in an employee's salary and determine if any of those should be treated as 'basic wages' for the purpose of PF contributions. Several organisations had obtained stay orders on adverse proceedings on this issue, due to the pendency of this matter before the Supreme Court. Now that protection will no longer apply. This ruling would also have an adverse impact on the appeals on this issue, that are already pending before the Central Government Industrial Tribunal (CGIT).

Organisations should take immediate note of this ruling and carry out a scrutiny of its pay structure and PF contribution practices, especially for employees whose basic salary is below INR 15,000 at present and for International Workers (for whom PF contribution caps don't apply).

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