Introduction: The position regarding EPF was not much clear in the essence of the fact that all wages need to be included for the deduction for EPF. In this view, recently, the Supreme Court has laid down a test flowing from the case of Regional Provident Fund Commissioner (II) West Bengal v. Vivekananda Vidyamandir & Ors., 2019 SCC Online SC291 wherein the Hon’ble Court has considered the question of the scope of ‘basic wages’ and allowances liable to be deducted for Employee Provident Fund contribution.

This judgment of the Supreme Court was long awaited which now has given clarification to all ambiguities prevailing in the area of Employees’ Provident Fund.

The Apex Court in the test has elaborated the criteria of including any wage paid by the employer in the ‘basic wage’ for the purpose of the Employee Provident Fund.The ruling and the simple test laid down in it has made the situation crystalline for the employers and labours.

Prior to the passing of this judgement, there were various ambiguities such as the question of what all basic wages include in its ambit. Employers were taking advantage of the same situation and were dividing the normal basic salary paid to all employees under different heads. By division of the normally paid salary under different heads in the salary structure, these allowances were treated by them as the special allowances (excluded for the purpose of deduction for EPF), thereby were taking the advantage of the name of the allowances and reduce their liability to contribute under Employees’ PF.

Employee’s Provident Fund Organization (EPFO):

EPFO is a Social Security Organization. The Employees’ Provident Fund Ordinance was promulgated on 15th November, 1951 in order to make the Employees’ Provident fund come into existence. Thereafter, the Employees’ Provident Fund Bill was introduced in the year 1952 for the institution of the provident funds of the employees. The EPFO comes under the administrative control of Ministry of Labour and Employment which is under Government of India.

EPFO mission includes; making the social security of employees a mandatory requirement, provide online services for the benefit and implementation of various policies for the support.

Basic Overview for Employee Provident F:

Before understanding the judgement of the Apex Court; it is pertinent to go through some basic rules of Employees’ Provident Fund Scheme in order to have a deep and intelligible understanding of the concept.

  • The ceiling of Rs. 15,000 has been fixed by the Government of India through a circular dated 29.08.2014. Employees’ PF issued a circular on the aforementioned date and increase the maximum amount liable for deduction to Rs. 15,000. Therefore, the basic rule of EPF scheme says that the deduction for Employees’ Provident Fund has to be contributed upto the amount of 15,000 for a month.
  • For the purpose of deduction, basic wages, dearness allowance and retaining allowance, if any, has to be computed, according to Section 6 of EPF Act, 1952.
  • The deduction for the aforementioned basis has to be done at the rate of 12%, as prescribed by the EPF Scheme, 1952.

Verdict of SC: The Apex Court in its judgement has laid down the test for determining whether a particular wage falls within the category of basic wages, and if it does so, it need to be included for the EPF deduction.

Numerous numbers of appeals filed by different companies against the various High Court judgements were dismissed on the basis that the Appellants in the said Appeals failed to explain the rationale behind giving those allowances to their employees.

Provisions Interpreted

Supreme Court in this case, in order to formulate this test, interpreted Section 2(b) and Section 6 of the Employees’ Provident Fund Act, 1952. Section 2(b) of the Act defines “basic wages” as 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. Section 6 provides that the contribution which shall be paid by the Employer shall include basic wages, dearness allowance and retaining allowance (if any), and therefore, allowances included in the basic wages are liable for the deduction of EPF contribution.

Question before the Court

The Supreme Court has jointly heard five different appeals arising from various High Courts and have interpreted the same question of law arising from these similar appeals that whether the special allowances paid to the employees will fall within the ambit of ‘basic wages’ for the purpose of determining the Provident Fund contribution.

Test Laid Down By SC

According to this test, to exclude any salary component, it must be either –

(a) Variable in nature; or

(b) Linked to any incentive for production resulting in greater output by an employee; or

(c) Paid especially to those who avail the opportunity; and

(d) That the allowance in question is not paid across the board to all employees, in a particular category.

Interpretation of the Test furnished

The aforesaid test is simple, which rules that if any payment was to be excluded from basic wage, the payment under the scheme must have a direct access and linkage to the payment of such special allowance as not being common to all. The crucial test is one of universality.

In other words, if any component of salary is paid to all the employees across the board, irrespective of the output or nature of work done by that employee, it will be accessible to Employee Provident Fund contribution and will form part of basic wages. The concern of the Apex Court was that these salary components are being camouflaged by employers as the special allowances which are anyway excluded for the purpose of Employee Provident Fund contribution and making it a tool to get rid of their liabilities or decrease the same. On the other hand, the criteria for excluding any salary component is clear that if the component or allowance is paid to any employee in relation to any greater output or somewhere specific to the work done, then it will clearly not form part of basic wages and hence, excluded from the purview of EPF contribution. When the workman produces beyond the basic or standard, what he earns in respect to that work done is not a basic wage.

Otherwise basic wage would ipso facto take within its ambit the entire salary structure’s component which are paid to the employees across the board or related to the output of any meritorious workmen producing some extra output. In order that the amount goes beyond the basic wages, it has to be shown that the workman concerned had become eligible to get this extra amount beyond the normal work which he was otherwise required to put in.

Therefore, the question that whether a particular wage component will be included in Employee Provident Fund contribution is a matter of fact, depending upon the each particular circumstance, taking into account the aforementioned test and does not depend upon the nomenclature of the component and allowance. Hence, the special allowance paid to all employees will form part of basic wages and ultimately is liable for deduction on account of EPF contribution.

For example: the overtime allowance, paid to the employees who work more than the normal working hours or holiday allowance, which is paid to the employees who work on holidays, will be excluded and not form part of basic wages according to the said test as the same allowances are specially paid to those employees only who work in greater output and the same is not paid to all the employees. Whereas if the allowances named as mobile allowance and medical allowance paid to all the employees across the board, it will form the part of basic wages.

Impact of Judgement

1. The employees may get a bit less earning at hand but the same implementation of test will surely be beneficial for their future; as the PF contribution which the employees will receive in future would be of much more amount as compared to the amount which they may have received if there has been no Supreme Court ruling on this point.

2. By the implementation of this test lay down by the Apex Court, the purpose of the Act which is protecting the interest of the employees after the retirement or their dependants after death of the employee will be reached in the actual manner.

3. All allowances which are paid usually and invariably to the employees will avail the treatment as the basic wages except the wages which are specifically excluded from the definition of basic wages under section 2(b) of Employees’ Provident Fund Act, 1952.

4. In order to come out of this liability, the allowances shall not be paid universally and to all the employees across the board.

5. The judgement will not affect the salaried employees. Only the employees earning salary up to Rs.15,000/- per month would be affected.

6. All the breakups in salary structure will be included in the basic wages irrespective of the name under which they are being paid to the employees.

7. The liability of the employers to contribute towards the PF fund of employees will increase by the application of the aforementioned test.

8. The application of the said rule will be having retrospective effect and the employers would need to abide by it after the passing of the judgement i.e. 28-02-2019.

Conclusion: By the passing of this Supreme Court judgement, the Court has put all controversies at end about the inclusion of numerous components of salary for the purpose of Employee Provident Fund deduction. The test laid, is basically the test of universality.

Employers were minimising their liability by dividing the salary structure into various components through different nomenclature and excluding them from incorporating in basic wages, which would be otherwise liable for deduction. Therefore, the special allowances are liable for deduction no matter by what name called.

This test will save the employees from prejudice at the hands of the employer and would also preserve the law from its mistreatment. Through the implementation of the rule the true intent of the legislature will be delivered.


  • Judgement passed by Hon’ble Supreme Court of India in matter of Regional Provident Fund Commissioner (II) West Bengal Versus Vivekananda Vidyamandir & Ors.; (2019) SCC OnLine SC 291.
  • Copy of circular bearing no. EDLI/24/Amendment scheme 2014 dated 29.08.2014 available on the official website of Employees’ Provident Fund Organisation.
  • Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
  • Employees’ Provident Funds Scheme, 1952.
  • Impact of SC judgment On PF applicability on allowances paid beyond Basic wage, 1st March, 2019; by Anil Kaushik.
  • Special allowance part of basic salary for PF calculations: SC, 1st March 2019; by Dhananjay Mahapatra.
  • Supreme Court On Employees’ Provident Fund Contributions: Universality Is The Test To Consider Allowances As ‘Basic Wages’, 12th March, 2019; by AnshulPrakash, JeevanBallav Panda, MeherTandon and AbhisekChoudhury.
  • Official Website of Employees’ Provident Fund Organisation.
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