PF set to cover all pay, not just basic

| May 29, 2013

You may end up saving more in the months ahead with the Employees Provident Fund Organization(EPFO) readying to re-notify a new definition of “compensation” that will include all your allowances, amid intense lobbying against the move by industry bodies.

Currently, employers get away by contributing only 12% of the basic salary and dearness allowance, which is not paid by most companies, towards their share of “matching” provident fund and the Employees Pension Scheme contribution. So, for several thousand employees, the basic salary remains constant, while increments are passed by way of enhanced or new allowances. In most cases, the tax liability for the employee goes up due to the salary hike — and companies earn tax credits on salary-related expenses — but the statutory provident fund contribution remains unchanged.

As a result, EPFO notified the changes last year but had to withdraw the circular in the wake of protests from employers and the perception that take-home salaries would come down. Even now, industry is resisting the move but EPFO is expected to go ahead with the plan as a panel set up by the labour ministry to vet the proposal has endorsed it.

The report is currently pending with the labour ministry but sources said the government will go ahead and notify the norms. To ensure that the proposal goes through without facing legal glitches, the EPFO board may also discuss and ratify it.

Industry chambers have, however, not given up the fight against the move. Confederation of India Industry (CII) has already dashed off a four-page letter to labour minister Mallikarjun Kharge arguing that the plan should be deferred, while other industry bodies are expected to step up lobbying against the move.

It has suggested that the matter is pending before the Supreme Court after a series of orders by high courts. When contacted, a CII executive said the move will reduce the investment options before an employee. “Someone may want to invest in a mutual fund scheme or buy shares. Besides, employees are happy getting allowances and if the move goes through, take-home salaries may come down,” the executive said. Then, he argued for the corporate sector, saying some of the small and medium enterprises will face a higher financial burden.

The lobby group is, however, backing another proposal that seeks to restrict reopening of cases beyond seven years, as it is meant to reduce harassment.

Government officials, however, countered the industry argument on the new compensation definition, saying EPFO membership was mandatory only for employees earning Rs 6,500 a month. Anyone beyond that level could opt out. Although it may be difficult for several employers to give the opt-out option, reworking of the salary structure to ensure that the wage bill doesn’t shoot up can be on the cards.


Category: EPF, EPFO, Finance Ministry, Provident Fund

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