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,

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