The Indian Supreme Court (SC) has ruled that cash allowances paid to employees, such as a conveyance allowance, special allowance, education allowance, medical allowance, should be included in basic wages for calculating Provident Fund (PF) contributions where they are ‘paid uniformly and universally by an employer to its employees’.
The SC held that contributions should be due as the case did demonstrate that these allowances paid by employer to its employees are variable in nature or linked to production incentive, and not paid across the board to all employees. The SC observed that payment of special allowances can be seen in some cases as an effort to reduce basic wage and consequently avoid a higher PF contribution.
This ruling is likely to have an impact on the PF contribution for the employees receiving allowances and who have basic wages up to INR 15,000 per month. Employees drawing basic salary above INR 15,000 per month can continue to contribute at minimum PF threshold and so may not be impacted.
International workers who do not contribute to social taxes in their home country under a totalisation agreement, may be particularly affected. They would have to make higher PF contribution as the minimum threshold of INR 15,000 does not apply to them. Businesses should also evaluate the impact of this ruling in determining the term ‘basic salary’ for income tax purposes. Full article available from www.grantthornton.in.
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