Understanding recent SC Judgment on deduction of PF of special allowances

Understanding recent SC Judgment on deduction of PF of special allowances

Hello Friends ! Here is the basic analysis of Supreme Court’s Land Mark Judgment in matter of Regional Provident Fund Commissioner (II) West Bengal Vs Vivekananda Vidyamandir and Others dated 28th February, 2019 which will help you in Understanding recent SC Judgment on deduction of PF of special allowances.

Legal Text Definition of Basic Wages is given below for reference:


“basic wages” means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include-

(i) the cash value of any food concession;

(ii) any dearness allowance that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living, house-rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;

(iii) any presents made by the employer;


Contributions and matters which may be provided for in Schemes. – The contribution which shall be paid by the employer to the Fund shall be ten percent. Of the basic wages, dearness allowance and retaining allowance, if any, for the time being payable to each of the employees whether employed by him directly or by or through a contractor, and the employee’s contribution shall be equal to the contribution payable by the employer in respect of him and may, if any employee so desires, be an amount exceeding ten percent of his basic wages, dearness allowance and retaining allowance if any, subject to the condition that the employer shall not be under an obligation to pay any contribution over and above his contribution payable under this section:

Provided that in its application to any establishment or class of establishments which the Central Government, after making such inquiry as it deems fit, may, by notification in the Official Gazette specify, this section shall be subject to the modification that for the words “ten percent”, at both the places where they occur, the words “12 percent” shall be substituted:

Provided further that where the amount of any contribution payable under this Act involves a fraction of a rupee, the Scheme may provide for rounding off of such fraction to the nearest rupee, half of a rupee, or quarter of a rupee.

Explanation I – For the purposes of this section dearness allowance shall be deemed to include also the cash value of any food concession allowed to the employee.

Explanation II. – For the purposes of this section, “retaining allowance” means allowance payable for the time being to an employee of any factory or other establishment during any period in which the establishment is not working, for retaining his services.

Understanding recent SC Judgment on deduction of PF of special allowances

Judgment of Supreme Court

Question Raised: The appeals raised a common question of law, which was that “whether the special allowances paid by an establishment to its employees would fall within the expression “basic wages” under Section 2(b)(ii) read with Section 6 of the Act for computation of deduction towards Provident Fund.”

In Simple terms the question was that: “Whether contribution towards EPF is required to be paid on Special Allowance?”

Arguments placed by council of Provident Fund Organization:

The special allowance paid was nothing but camouflaged dearness allowance liable to deduction as part of basic wage.

Section 2(b)(ii) defined dearness allowance as all cash payment by whatever name called paid to an employee on account of a rise in the cost of living.

The allowance shall therefore fall within the term dearness allowance, irrespective of the nomenclature, it being paid to all employees on account of rise in the cost of living.

The special allowance had all the indices of a dearness allowance and thus should be included in salary while calculating the amount which is liable for deduction of PF.

Arguments placed against Provident Fund Organization:

The common submission on behalf of the appellants in the remaining appeals was that basic wages defined under Section 2(b) contains exceptions and will not include what would ordinarily not be earned in accordance with the terms of the contract of employment.

Even with regard to the payments earned by an employee in accordance with the terms of contract of employment, the basis of inclusion in Section 6 and exclusion in Section 2(b)(ii) 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 are excluded for the purposes of contribution.

Dearness allowance was payable in all concerns either as an addition to basic wage or as part of consolidated wages.

Retaining allowance was payable to all permanent employees in seasonal factories and was therefore included in Section 6.

It is only those emoluments earned by an employee in accordance with the terms of employment which would qualify as basic wage and discretionary allowances or special allowances not earned in accordance with the terms of employment would not be covered by basic wage.

The statute itself excludes certain allowance from the term basic wages. The exclusion of dearness allowance in Section 2(b)(ii) is an exception but that exception has been corrected by including dearness allowance in Section 6 for the purpose of contribution.

Special Allowances are not made universally, ordinarily and necessarily paid to all employees and therefore will not fall within the definition of basic wage and therefore should not be included in salary while calculating the amount which is liable for deduction of PF.

Key Takeaways from the Ruling of Hon’ble Court:

– Any variable earning which may vary from individual to individual according to their efficiency and diligence will stand excluded from the term “basic wages” was considered in Muir Mills Co. Ltd., Kanpur Vs. Its Workmen, AIR 1960 SC 985

– Where the wage is universally, necessarily and ordinarily paid to all across the board such emoluments are basic wages.

Where the payment is available to be specially paid to those who avail of the opportunity is not basic wages. By way of example it was held that overtime allowance, though it is generally in force in all concerns is not earned by all employees of a concern. It is also earned in accordance with the terms of the contract of employment but because it may not be earned by all employees of a concern, it is excluded from basic wages.

– Any payment by way of a special incentive or work is not basic wages.

Manipal Academy of Higher Education vs. Provident Fund Commissioner, (2008) 5 SCC 428

Conclusion : Special allowances in question being paid to its employees were neither variable nor were linked to any incentive for production resulting in greater output by an employee 

Also the allowances in question were not paid across the board to all employees in a particular category or were being paid especially to those who avail the opportunity.

Judgment : Special allowances in question were essentially a part of the basic wage are liable to deduction and contribution to the provident fund account of the employees.

What we learnt : From the above ruling, it can be said that special allowance or any other allowance, by whatever name called, normally paid by an establishment shall be taken into consideration for the purpose of computation of contribution towards EPF unless it is linked to individual factors as detailed supra. The test as mentioned above needs to be applied for every payment/allowance and which may not necessarily lead to a cent percent conclusion and depends on the facts and circumstances of each payment.

Understanding recent SC Judgment on deduction of PF of special allowances
Understanding recent SC Judgment on deduction of PF of special allowances

Impact : The impact of such a decision could be two-fold. One, the contribution towards EPF will be on a higher amount and hence less take-home pay for the employee. And, secondly, the retirement kitty will see more inflows as higher monthly PF contribution will move into the employee’s PF account.

TDS on Salary Calculator for FY 2019-20 & FY 2018-19
TDS on Salary Calculator for FY 2019-20 & FY 2018-19

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. In no event shall I shall be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.

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  1. Thank u very much for clarifying the Supreme Court Judgement.
    But, the term Special Allowances will include overtime payments and House Rent Allowance paid to workers or not?
    Pls answer my query.
    Thank u

    1. Hello Sir
      If we read the judgement carefully 2 kinds of allowances have been kept out
      One are allowances like bonus which depend upon capacity of different employees
      And another is allowances given in special circumstances like HRA (as Ideally HRA is given by company only when employee is not having his own house )
      Therefore Overtime and HRA should not be included while calculating salary for PF

  2. Yes Sir
    You are absolutely correct
    The order will be applicable to those with a basic salary and allowances up to Rs 15,000 as PF contribution. Beyond that, PF is not mandatory

  3. The judgment impacts all the benefits which has a linkage with basic wages and/or dearness allowance – PF, Gratuity. Leave encashment, notice pay. The Court has relied upon the test of universality and the direct linkage test (direct link of special payment to special work performed).

  4. you mean to say that above Rs:15000/- drawing employees will not come under this ruling?. or is it applicable to all levels of salary amount drawing employees and when it will come to effect ?.
    please clarify

    1. Hello Sir
      Sorry for late reply
      As per my understanding, pf is compulsory when salary is upto Rs 15000.
      So this judgment will impact only those employees.

  5. As per the SC order dt. 28/3/2019 related pf contribution on special allowances so please clarify how many allowances are under special allowances. Our employer give him the following allowance with basic pay.
    1.HRA 2.Education allowance 3. food allowance 4. Medical allowance 5. Transport allowance 6.washing allowance.
    please confirm how many allowance under special allowance.

  6. The judgement says that special allowances are to be included. My question is which allowances are included in special allowances ?? whether magazine allowance, uniform allowance etc are type of special allowance ???

  7. Thanks much. Would appreciate if you could clarify the below:
    Should we not apply the principle laid down in the judgement for HRA allowance. In a Company where HRA is given to all employees would that still be excluded for PF calculation. Para 14 contains the crux of the Judgement. If you apply the tests mentioned in para 14 to HRA allowance can that be still be excluded.

  8. If my salary is 30,000/- including allowances than for 12% it will be Rs. 3600/- towards PF contribution but i want to choose maximum cap of Rs. 1800/- on 15,000/- salary is it possible???


  10. Hi Pratibha Please clarify…..
    If a worker has salary 12000/- and special allowance is 5000/- then gross is 17000, as per court order is it mandatory to deduct epf on his gross salary
    (1) 12000+5000=17000) EPF 12% = 2040
    (2) Or we can deduct upto 15000*12%=1800

    1. Hello Balbirji
      See as per courts Judgement the pf would be deducted from Gross Salary (Basic+ SA) .
      But in your case the Gross salary would be more than Rs. 15000 pm. And PF is not compulsory if Salary is more than 15000 pm.
      Here If you are deducting and paying PF, that is because of your own wish.
      Here you should deduct the PF as per your company’s policy as there is no legal implication for the same.

    2. Dear Balabir Singh ji
      Here in your situation, total monthly salary is Rs 17000 pm. PF provisions are not compulsory when total monthly salary is more than Rs 15000 pm.
      So in your case you can deduct PF as per your company’s policy as there is no legal implication.

  11. please clarify that my Basic 7300/- pm ,HRA 40% of Basic,Conveyance Allowance 1600/- ,Child Education 200/-,LTA 8.33% OF BASIC,MEDICAL ALLOWANCES 8.33% OF BASIC,BONUS 8.33% OF BASIC,SPECIAL ALLOWANCE 1500/-

  12. Hello Pratibha,
    The article is quite clear and most of your responses sums up with the needed answer. But just to be a bit more clear probably a simple example would help.
    basically case 1: If a Basic is 15,000.00 ,HRA 7,500.00, Conveyance 1,600.00 ,Special Allowance 38,222.00 ,LTA 1,200.00 ,Medical Allowance is 1,250.00 and total gross=64,772.00 (PF Employee Contribution=1800 and Employer 1800) should we be good in this case
    Case 2: Basic 12000+HRA 6000+ Conveyance 1600+ Lta 1200+ Medical all 1250 +Special allowance 7000= Gross 2905.00
    Case 3: Basic 5000+ HRA 2500+ Spcial All 5000= Gross 12500
    So case 1 and case 2 believe the SC rule shall not be applicable and for case:3 it does(correct me if i am wrong with the my interpretation)

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