India: The Basic Wages Conundrum Under The EPF Act


As per the Employees' Provident Funds Scheme, 1952 (Scheme), contributions payable by an employee must be at the rate of 12% of the basic wages. As per Section 2(b) of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (Act), 'basic wages' mean all emoluments which are earned by an employee in accordance with the terms of the contract of employment and which are paid, or payable in cash to such employee. The basic wages, however, do not include: (i) the cash value of any food concession; (ii) any dearness allowance, house-rent allowance, overtime allowance, bonus, commission, or any other similar allowance payable to the employer in respect of his employment or of work done in such employment; and (iii) any presents made by the employer.

The definition of 'basic wages' under the Act and the salary components to be accounted for when determining such basic wages for the purposes of provident fund contributions has long been the subject matter of debate. While various stakeholders have taken the view that any special allowances (in addition to those specifically excluded) payable to an employee should not form part of an employee's basic wages, the Employees' Provident Fund Organisation (EPFO) and various courts of law have adopted contradictory approaches.


By way of a circular dated 20 November 2012 (Ref: 7(1)2012/RCs Review Meeting/345) (First Circular), the EPFO clarified that all allowances which are ordinarily, necessarily, and uniformly paid to employees are to be treated as a part of the basic wages. The First Circular stated that all allowances such as conveyance, special allowance, etc., are to be treated as a part of basic wages since these are paid ordinarily, necessarily, and uniformly to employees. Therefore, barring the specific exclusions set out under Section 2(b) of the Act, all additional allowances payable to an employee were to be treated as part of the 'basic wage' component.

The notification of the First Circular was met with severe resistance from employers and employees alike since it had a direct impact on an employee's net take-home salary. Owing to mounting pressure, the EPFO placed the First Circular on abeyance until further orders by way of circular dated 18 December 2012 (Ref: 7(1)2012/RCs Review Meeting/21224) (Second Circular). Despite such abeyance, various courts of law continued to take contradicting views while analysing the components of basic wages for the purposes of determining provident fund contributions.

In the matter of Whirlpool of India Limited v Regional Provident Fund Commissioner1, a single bench of the High Court of Delhi held that 'canteen allowance' was very much a part of an employee's basic wages. It observed that the use of the words 'any other similar allowances' in the definition of basic wages provided under the Act, was to be read in conjunction with the word 'commission'. Hence, canteen allowances would not fall under the gamut of specific exemptions listed under Section 2(b) of the Act. When the Petitioner therein, placed reliance on the abeyance provided under the Second Circular, the High Court of Delhi held that the provisions of the Second Circular cannot override the statutory interpretation required for the provisions of the Act.

Following the footsteps of the High Court of Delhi, a division bench of the High Court of Madhya Pradesh in Montage Enterprises Private Limited v Employees' Provident Fund2 held that certain allowances such as conveyance allowance, transportation allowance, and special allowances should be treated as a part of basic wages under the provisions of the Act. Accordingly, provident fund contributions should be remitted on such allowances. Similarly, in the case of Surya Roshni Limited v Employees Provident Fund3, the High Court of Madhya Pradesh took the view that conveyance allowance, attendance incentives, lunch allowances and other similar allowances would all form part of the 'basic wage' component, subject to such allowances being paid ordinarily, uniformly, and necessarily to employees. The rulings of the High Court of Madhya Pradesh in the above cases are now subject matters of a special leave petition pending before the Supreme Court. While the Supreme Court has stayed the judgments passed by the High Court of Madhya Pradesh in the said cases until further orders, it has called upon Surya Roshni Limited, the employer therein to deposit 60% of the demanded arrear amounts to the EPFO.

In analysing the permissibility of an employer to structure an employee's wages under various components, a division bench of the High Court of Karnataka in the case of Group 4 Securities Guarding Limited v Regional Provident Fund Commissioner4 held that: "... any agreement entered into between the employer and its employees for splitting of the amount payable by the employer to its employees for the service rendered by them, cannot take away the power of the Commissioner under Section 7A of the Act to look into the nature of the contract entered into between the employer and its employees and decide that splitting up of the pay payable to the employees under several heads is only subterfuge to avoid payment of contribution by the employer to the provident fund. It was open to the Commissioner to lift the veil and read between the lines to find out the pay structure fixed by the employer to its employees and to decide the question whether the splitting up of the pay has been made only as a subterfuge to avoid its contribution to the provident fund."


While most employers split wages under various heads to ensure that employees have a higher take-home salary, given the views taken by the courts of law, it will only be prudent for employers to include allowances that, do not fall within the specific exclusions under the EPF Act, and are ordinarily, necessarily, and uniformly paid to its employees, as a part of the basic wage component while determining the extent of contributions payable to the EPFO.


1. Writ Petition (Civil) No 7729 of 1999

2. Writ Petition No 1857 of 2011

3. 2011 LLR 568

4. ILR 2004 Kar 2067

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