Dec 11, 2012

Save more in PF but take home less as Salary

EPFO Clubs Basic Pay and Allowances


Mumbai: In a move that would increase savings of salaried employees while cutting their take-home pay, the Employees Provident Fund Organization has released a circular saying PF must be computed on the basis of basic pay and all allowances being paid to the employee. 
If EPFO insists on implementing the circular, the PF amount of employees would go up at the cost of their take-home salary since most companies havebeen computing PF contributions (at 12% each by the employer and employee) against basic salary and dearness allowance only..
The circular dated November 30, 2012, was issued after internal review meetings held in late November and has been forwarded to Employee Provident Fund offices across India.
The definition of basic wages has long been a contentious issue, with PF authorities claiming that companies split the basic wages into various allowances to reduce the quantum of PF contributions.
The circular aims at addressing this issue.
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The Centre on Monday issued a stern message to taxpayers, asking them to reveal their true incomes and pay advance tax by December 15 or face action. Only 14.62 lakh individuals and corporates have disclosed taxable annual income above Rs 10 lakh for the current fiscal, according to the finance ministry. P 23 HCs’ rulings on basic pay behind EPFO move
 T he EPFO circular states that basic wages will include all allowances which are “ordinarily, necessarily and uniformly” paid to the employees. Thus, various allowances such as conveyance, educational allowance, medical allowance etc, will have to be taken into consideration while computing the PF contribution. 
Last year, the Madras high court and the MP high court in two separate cases had held that allowances paid by the employer to employees under different heads such as conveyance, education, food concession, medical, special holidays, night shift incentives, city compensatory allowance etc, qualified as basic wages under section 2(b) of the PF Act and needed to be included while computing the PF contribution.
Based on these judgments, PF officials carried out audits on India Inc andraised demands to recover the differential PF contributions. Later, pending dismissal of the writ petitions filed by these companies, the audits were held in abeyance.
“Following this circular, the PF officials may once again commence audits of Indian companies to ascertain whether the PF contribution has been rightly computed and deposited,” says Yatin Pathak, CA. Sonu Iyer, partner, Ernst and Young, said there were ways to beat higher PF cuts. Proviso to paragraph 26A of the PF scheme allows PF contributions by the employer and employees on a maximum notional level of Rs 6,500 per month, instead of the entire salary (including allowances). The rate remains the same at 12% each for the employer and employee contributions respectively.
 “Not many employers have opted for this route, as PF is part of the employees cost to company and it also
 gives a tax shield to employees. Now, if the employer organization wishes to exercise this option and computes PF contributions only against Rs 6,500 per month, it is not clear whether the PF authorities will oblige,” Iyer explains. 
Expatriate workers from India also have to contribute to PF, even if their salary is paid outside India (unless they have exemption owing to a social security arrangement with the country to which they have been deputed).
Unfortunately, for them, this notional limit of Rs 6,500 doesn’t apply. “If an employer has expat workers, there is a higher likelihood of their being subject to scrutiny by PF authorities,” adds Iyer. A similar matter is up for interpretation before the Supreme Court, but until then, PF authorities are likely to commence audits and raise demands on India Inc, based on the circular.

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