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As provident fund in India plays a major role in contributing the savings of the employee, it is the
responsibility of all the citizens to understand the basic knowledge of provisions of the act. This article
tries to explain the applicability, contribution rates, various methods for calculation of contribution, types of
provident fund, taxability of contribution to various funds and so on.
Applicability of the Act:
(a) to every establishment which is a factory engaged in any industry specified in Schedule I and in which
20 or more persons are employed and
(b) to any other establishment employing twenty or more persons or class of such establishments which
the Central Government may notify.
An establishment to which this Act applies shall continue to be governed by this Act notwithstanding that
the number of persons employed therein at any time falls below twenty. (Once applicable always
applicable)
Wage limit for Contribution of Provident Fund:
Employees drawing basic salary up to Rs.15,000 have to compulsory contribute to the provident fund and
employees drawing above Rs.15,000 have an option to become member of the provident fund.
Employee who while joining the organization has a basic salary above Rs 15,001 have an option to either
become or avoid becoming member of Provident fund, but employees whose basic salary while joining
the organization is less then Rs 15,001 but after some period of time their basic increases above Rs
15,001 have to compulsorily continue to be member of provident Fund (doesn’t have an option to
terminate the membership form of the provident fund)
Contribution to the provident fund:
Section 6: The contribution which shall be paid by the employer to the Fund shall be 12% (Basic wages +
dearness allowance + retaining allowance)
Components for calculation of contribution:
Provident Fund contribution is required to be made @ 12% on the ‘Monthly Pay’ which is understood as:
– Basic wages (as defined in Sec 2(b) of the PF Act),
– Dearness Allowance
– Cash Value of Food Concession
– Retaining allowance.
Section 2(b) of the Act “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.
From the above definition it is clear that all the emoluments which are earned by an employee other than
those specifically excluded components given under clause i, ii & iii of Sec 2(b) of the Act, would be the
basic wages for the purposes of contribution under the Act
Interpretation of ‘Any other allowance’ appearing in cluse (ii) above
The Hon’ble Supreme Court in Jay Engineering Works Ltd v Union of India, ruled that the expression ‘any
other similar allowance’ should be of the same type as the allowances mentioned in the clause such as
‘dearness allowance’, ‘house rent allowance’, ‘overtime allowance’, ‘bonus’ and ‘commission’ as
specifically excluded under Section 2(b) of the Act.
Based on court Rulings:
Whether to constitute particular allowance as a basic wages or not, it was held that in March 2011, by the
Honorable High Court of Madhya Pradesh that
Allowances which are universally, necessarily and ordinarily paid to all employees across the
board need to be considered while determining the PF liability.
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 is generally in force in all concerns, it is
not earned by all employees of a concern.
It is also earned according to the terms of employment contract but because it may not be earned by all
employees of a concern, it is excluded from basic wages.
It was also held that conversely, any payment by way of special incentive or work is not basic wages.
Rates of Contribution:
Employer’s Contribution
Employer’s Contribution
Employer’s Contribution
Employer’s Contribution
Employer’s Exempt from Tax Not treated as Income Not treated as Employer
Contribution up to 12% of salary Income of the doesn’t have
year in which an option to
contribution is contribute
made
Interest Credited Exempt from Tax Not treated as Income Not treated as Exempt from
to provident Fund up to 9.5% of interest Income of the Tax
credited year in which
interest is
credited
Lump sum Exempt from Tax Exempt from Tax in (Refer Note2) Exempt from
payment at the some Tax
time of the situation (Refer Note1)
retirement of
service
Notes:
1) Taxability of accumulated balance of recognized provident fund:
If the following conditions are satisfied accumulated balance received is not taxable:
(i) The employee has rendered continue service with his employer for a period of 5 years or more.
(ii) If the employer has been terminated because of the certain reason which are beyond his control
(iii) If the employer has resigned before completion of 5 years but he
joins another employer who maintains recognized provident fund and provident fund money has been
transferred from current employer to the new employer.
If withdrawal is taxable, Section 192A is attracted and provision is as follows:
The trustees of the EPF Scheme 1952 framed under section 5 of the EPF & Misc. Provisions Act, 1952 or
any person authorized under the scheme to make payment of accumulated balance due to employees, at
the time of payment of accumulated balance due to the employee, deduct income tax thereon @ 10% if
the amount of such payment or aggregate of such payment exceeds Rs 50,000/-
2) Taxability of Lump Sum payment received from Unrecognized Provident Fund:
(i) Payment received in respect of employer’s contribution and interest thereon is taxable under the
head “Salaries”
(ii) Payment received in respect of interest on employee’s contribution is taxable under the head “Income
from other sources”.
(iii) Payment received in respect of employee’s contribution is not chargeable to tax.
Different Types of PF Forms for Employees:
For different types of purposes, different forms have been specified under the act. The forms are as
follows:
4) Transfer Form 13