There have been several controversies surrounding the calculation of Provident Fund ("PF").  The Supreme Court, in the case of "The Regional Provident Fund Commissioner (II) West Bengal v. Vivekananda Vidyamandir and Others", has laid to rest these controversies by shedding light on which components of an employee's salary can be considered as basic wages for the purpose of PF calculations.

Before we examine the outcome of the judgment, it's important to take a look at the meaning of 'basic wages'. The term 'basic wages' has been defined by sections 2 (b) (ii) and 6 of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952 ("PF Act") to mean "all emoluments which are earned by the employees while on duty or on leave or on holiday with wages in accordance with the terms of their employment contract (and is payable in cash) and includes dearness allowance, retaining allowance1, and the cash value of food concession, but does not include allowances such as bonus commission, house rent allowance, overtime wages, and presents made by the employer".

It is pertinent to point out that prior to the passing of this judgment; the labor authorities had voiced their concern over the manner in which employers were camouflaging certain allowances (that should have been made part of the employee's basic wages for the purpose of calculating PF) as 'special allowances' in order to avoid PF deductions.

The judgment clarified that allowances, if paid equally across the board to all employees, will be considered as part of "basic wages" for the purpose of calculation of employees and employers PF contribution.  Conversely, allowances that are in the nature of a variable, or are linked to the employee's performance and therefore, not universal in its nature could not be considered as part of basic wages.  Simply put, emoluments which vary from employee to employee according to their efficiency and diligence cannot be considered as basic wages.  Therefore, as a rule of thumb, emoluments earned by an employee in accordance with the terms of his/her employment contract would qualify as basic wages while discretionary allowances, not earned in accordance with the terms of his/her employment contract, could not be considered as basic wages but as special allowances.

This judgment reiterated what has been held in Manipal Academy of Higher Education v. Provident Fund Commissioner (2008) 5SCC 428, such as:

  • Emoluments that are paid universally, necessarily and ordinarily to all employees across the board are considered as basic wages.
  • Allowances that are paid to those employees who avail of an opportunity are not considered as basic wages but as special allowances. For e.g., overtime allowance, though payable by most employers is not earned by all employees, and therefore, overtime allowance cannot be considered as part of basic wages.
  • Allowances that are paid by way of a special incentive or work are not considered as basic wages but as special allowances.

Accordingly, allowances such as, conveyance allowance, medical allowance, food concession, education allowance if paid universally to all employees will come under the ambit of basic wages.


This judgment impacts those employees who earn up to Rs. 15,000/- month. As a result of this judgment, the employee's contributions will increase since the various allowances (as mentioned above) may come under the ambit of basic wages and cannot be considered as special allowances. While for the employee, this means that their 'take home salary' decreases.  However, on the positive side, this also means more saving for the employees.

Conversely, employers will also have to shell out more money in the form of employer's contribution.  As you may be aware, the PF Act requires both the employer and employee to contribute 12% on the employee's basic wages.

While prior to the passing of the judgment, employers could bifurcate the employee's salary into different allowances in order to reduce his/her basic wages but pursuant to the judgment, this will pose to be a challenge. The only way to circumvent this is if the employer could show that the allowance is a variable amount which varies from employee to employee based on their efficiency and diligence and is not paid universally across the board.

Moreover, please note that the judgment is silent on its implementation. However, it's unlikely that this judgment will have retrospective application.


1 Allowance paid to an employee for retaining his services even though there is no work for the said employee.

Originally published 15 April 2019

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