On February 28, 2019, the Supreme Court of India passed a landmark order on whether special allowances fall within the scope and meaning of "basic wages" under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (the "EPF Act"). Under the EPF Act, provident fund contributions of 12% need to be paid by an employer and employee on the employee's basic wages, dearness allowance and any retaining allowance. The definition of basic wages excluded specific categories including overtime allowance, house rent allowance, bonus and the category of "any other allowance payable to the employee in respect of his employment or work done in such employment". Companies typically treat the said carve-out as a 'special allowance', which is not subject to provident fund contributions. While structuring the salary components, special allowance was often 30-40% of an employee's salary, on which they would not remit provident fund contributions.

Through this Supreme Court order, allowances which are universally and ordinarily paid to all employees across the board have to be held as basic wages rather than special allowances. Allowances which are paid out to an employee as an incentive or for work performed beyond the regular work requirement can be excluded from the scope of basic wages, not otherwise. All universal allowances thus now need to be treated as part of "basic wages" and subject to provident fund contributions.

This issue had come up several times previously before the courts, including the Supreme Court and the new order makes it effectively clear that an employer cannot create an allowance structure from an employee's compensation just to avoid paying the required provident fund contributions.

While the Employees Provident Funds Organisation has long maintained that special allowances are part of the basic wages and subject to provident fund contributions, several companies had challenged this issue. With the current Supreme Court order, employers should ensure that they are making provident fund contributions on the required components of basic wages, dearness allowance and retaining allowance under the EPF Act and are excluding only statutorily permitted allowances such as house rent allowance, overtime allowance or a bonus.

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