Calculate PF on gross pay and NOT on Basic head of pay – Part II
In our previous post we talked about the why PF should be calculated on gross salary and not on Basic head of pay.
Since employees and employers are not mandated to contribute PF on PF Gross (please read our previous post for the definition of PF Gross) over and above Rs 6,500 per month, the employees whose PF gross is over Rs 6,500 per month will not be impacted on account of calculation of PF on gross salary. The employees who will be impacted are those who receive PF Gross of less than Rs 6,500 per month.
Switching to calculating PF on gross salary
If your organization currently calculates PF as 12% of Basic head of pay, please consider changing the basis of your PF calculation at the earliest. Here are the steps towards changing the basis of PF calculation.
1. Define PF Gross for the purpose of PF calculation.
Please examine the heads of pay in the pay structure used in your organization and determine (as per the PF Act) what all heads of pay should be considered and left out for the purpose of PF calculation.
Heads of pay to be included in PF Gross are Basic, DA, cash value of food concession, all allowances (Conveyance, Transport Allowance, Other Allowance, Special Allowance etc.) except House Rent Allowance (HRA). Please exclude HRA, Overtime Allowance, Bonus, Commission and such other similar pay from PF Gross. If you pay any performance based pay (say, incentives calculated on sales, production and other performance parameters) which are similar to bonus and commission, please exclude such heads of pay. Both statutory and performance-based bonus should be excluded from PF Gross.
2. Employees whose Basic (plus DA) is more than Rs 6,500 per month.
For employees whose earned Basic (plus DA) is more than Rs 6,500 per month, you could continue deducting PF on Basic pay (plus DA). Of course, if you do not mind the additional cost, you can switch to calculating PF on their PF Gross even though you are not required to do the same.
3. Employees whose Basic (plus DA) is less than Rs 6,500 per month.
Please determine the PF Gross and calculate PF as 12% of PF Gross. In case 12% of PF Gross is more than Rs 780 (i.e. 12% of Rs 6,500), you can choose to restrict PF to Rs 780 per month.
Here are some illustrations for PF calculation.
Illustration 1
Salary: An employee receives Basic pay of Rs 10,000 per month.
PF calculation: Since the employee’s Basic is above Rs 6,500, the stipulated ceiling for mandatory PF Gross, his PF contribution can be calculated as 12% of Basic i.e. Rs 1,200 in this case.
Illustration 2
Salary: An employee receives Basic pay of Rs 3,000 per month and Rs 3,000 under Special Allowance.
PF calculation: Since the employee receives Rs 3,000 under Basic and Rs 3,000 under Special Allowance, a head of pay which should be in PF Gross, the PF contribution cannot be calculated as 12% of Rs 3,000 but should be calculated as 12% of Rs 6,000 (the PF Gross), which is Rs 720.
Illustration 3
Salary: An employee receives Basic pay of Rs 3,000 per month and Rs 3,000 each under Special Allowance and Other Allowance.
PF calculation: Since the employee receives Rs 3,000 under Basic and Rs 3,000 each under Special Allowance and Other Allowance, heads of pay which should be in PF Gross, the PF contribution cannot be calculated as 12% of Rs 3,000 but should be calculated as 12% of Rs 9,000 (the PF Gross), which is Rs 1080. In this case, since the PF Gross is greater than Rs 6,500, you have the option of restricting the PF Gross to Rs 6,500 for calculation of PF. In other words, you can calculate PF as 12% of Rs 6,500 instead of Rs 9,000.
3. PF calculation in the first and last month of service and in case of loss of pay.
It should be noted that PF calculation is on earned pay (the actual pay made to an employee after adjusting for loss of pay) and not fixed pay stated in the appointment letter. Even if the fixed Basic pay is above Rs 6,500, if an employee does not work the whole month in his first or last month of service or has loss of pay, his earned Basic pay could fall below Rs 6,500 in a month. In such a month, PF should be calculated on PF Gross instead of just Basic pay.
Illustration 4
Salary: an employee receives Rs 10,000 per month under the Basic head of pay and Rs 10,000 under Special Allowance (a head of pay to be included for PF calculation). He joins the company in the middle of a 30-day month and gets paid only for 15 days.
PF calculation: The earned Basic for the month shall be Rs 5,000 while his earned PF Gross is Rs 10,000. If one were to calculate PF only on Basic pay, the employee’s PF shall be 12% of Rs 5000 for the first month. However, since the earned Basic amount is less than Rs 6,500 in the first month of service, you need to calculate PF on PF Gross (Rs 10,000) instead of just Basic head of pay for the first month. As stated in Illustration 3, even here since the PF Gross is greater than Rs 6,500, you have the option of restricting the PF Gross to Rs 6,500 for calculation of PF.
From the second month onwards, you can switch to calculating PF on earned Basic as long it remains above Rs 6,500 per month.
The basis of PF calculation should be PF Gross whenever Basic falls below Rs 6,500 in a month.
The above illustration holds even in an employee’s last month of service and when an employee has loss of pay — instances when the earned Basic could fall below Rs 6,500 in a month.
Please note that even if you are calculating PF only on restricted Basic (Rs 6,500) instead of full Basic (the actual Basic amount), the PF calculation should be on PF Gross instead of Basic head of pay in case PF contribution falls below Rs 780 per month.
For those of you who are mathematically inclined, here is a simple algorithm for PF calculation. This sums up the basis of PF calculation if you wish to continue calculating PF on Basic (when the earned Basic is greater tha Rs 6,500) and switch to PF Gross when the earned Basic falls below Rs 6,500 per month.
MAX (ROUND (IF (Earned Basic >= 6500, Earned Basic, MIN (PF Gross, 6500))), 0) * 12%
Note:
1. The Min function ensures that PF Gross is restricted to Rs 6,500 when the Basic pay is less than Rs 6,500.
2. If you are calculating PF on restricted Basic (i.e. maximum of Rs 6,500) the above algorithm will not work. For PF calculation on restricted Basic, please modify the algorithm as follows.
MAX (ROUND (IF (Earned Basic >= 6500, 6500, MIN (PF Gross, 6500))), 0) * 12%
3. The Max function compares the PF Gross with zero and chooses the higher of the two for PF calculation. What is the need for the Max function here? The answer is quite simple. In case you have figured it out, please post the answer in the comments section of this blog. If you need the answer, let us know.
4. Specify the PF Gross clearly in ECR and other PF records.
Please ensure that the salary amount on which PF is calculated is entered accurately in the online Electronic Challan Cum Receipt (ECR) and other records. In case of any inspection or notice from the PF department, you will need to explain the basis of PF calculation.
5. Salary for PF calculation should not be less than “minimum wages.”
The PF department, by way of a circular, has stated that the salary for the purpose of PF calculation should not be less than the minimum wages specified by the Minimum Wages Act. For example, if the PF Gross is Rs 2,000 per month and the minimum wages is Rs 3,000 the PF department may not accept the PF calculation and ask the organization to calculate PF on at least the minimum wages. If an organization is in full compliance with the Minimum Wages Act, it will automatically comply with this dictat of the PF department.
6. Assess the income tax liability.
As per the Fourth Schedule of the Income Tax Act, 1961, the employer contribution to PF is exempt from income tax only to the extent of 12% of Basic pay and DA. When PF calculation is based on PF Gross instead of Basic (plus DA), the employer contribution to PF could attract tax. The employer contribution over and above 12% of Basic head of pay and DA shall be taxable. Please ensure that the employer PF in excess of 12% of Basic (plus DA) is taxed in the hands of the employee while calculating tax on salary paid to employees.
Illustration 5
Employer PF contribution: An employee receives Rs 5,000 per month under the Basic head of pay and Rs 6,500 is the PF Gross. The employee has no DA. The employer contribution is calculated as 12% of PF Gross i.e. 12% of Rs 6,500 which is Rs 780.
Tax liability: The employer contribution which is exempt from tax is 12% of Basic, Rs 600 (12% of Rs 5,000). Since the employer contribution is Rs 780, the amount of Rs 180 (Rs 780 – Rs 600) should be added to taxable salary of the employee. The taxable employer PF amount should be presented in the Form 16 of the employee.
We welcome your point of view. Please leave your comment here or send an email to info@hinote.in if you wish to contact us in private.
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Leave a Comment (47) ↓
Basic-12360
Grade Pay-4200
DA-80%
please advise
DA amount -calculation is to be on Basic- 12360 OR 12360+4200)
PF to be calculated on Basic- 12360 OR 12360+4200
Gratuity to be calculated on 12360 OR 12360+4200
In the above example, MAX function will determine if only your basic is greater or your pf gross is greater.
Accordingly 12% will be calculated.
i.e.
1. If Basic PF Gross, Max function returns value of Basic & 12% is calculated on that value.
No, the IF function determines that. The MAX function is meant for something else. It compares the gross pay with zero and selects the max of the two (gross pay or zero). Why do we need to use the Max function here?
Let me know if you are unable to figure out the answer. I will post it here.
Dear Sir,
Thanks for the detailed report on PF calculation.
I just need one more clarification regarding PF deduction towards resigning of an employee.
An employee gets an salary of Rs. 9500/-
Basic: 3800; DA: 3539; HRA: 1661; Conveyance: 500
Let us assume that the employee resigns on 5th November.
In this case, he has to be paid 5 days salary and accordingly PF should be deducted for 5 days.
His LOP will be 25 days amounting to Rs. 7917/-
In this case, how much PF should be deducted for this employee…?
His PF gross will be Rs. 7839/- which is lesser than 25 days LOP…
If we take LOP on gross, PF value goes negative…
The amount should be deducted towards PF is Rs. 157/- Hope I am right…
The system will not calculate automatically… These type of cases are very rare and I calculate manually… LOP towards PF should be calculated towards PF gross… I just wanted to know how the other organizations are working out in these type of cases… Need your advice on the same…
Thanks & regards,
Saravanan. M. J
PF Gross for 5 days’ pay = Rs. 1,307
PF deduction/contribution = 12% of Rs 1307 = Rs 157
Dear Sir,
This is regarding income tax liability towards PF.
I read the posted example and it would be better if you clear my doubt.
Clarification: 1
Both the Employees PF amount and Employers PF amount will be exempted towards tax calculation…?
Clarification: 2
An employee pay structure as follows:
Basic: Rs. 35000/-
DA : Rs. 3539/-
HRA : Rs. 17500/-
Conv: Rs. 800/-
According to PF gross, Rs. 4720/- will be deducted towards his PF.
What about the tax liability…? The tax liability towards PF should be taken on 35000 plus 3539 or Rs. 4720/-
Supposing the PF is Rs. 6000/- since the employee makes volutary PF.
What about the tax liability…?
Thanks,
Saravanan. M. J
Employee PF is a deduction and not a salary component in the hands of the employee. Hence, there is no question of imposing tax on Employee PF. Employer PF is typically tax exempt.
wages Rs, 600/- day work 26 day earn 15600/- if next month
his work if ony 10 days , we is under EPF or Not
The first question is whether you are under ESI. If yes, then ESI has to be deducted irrespective of whether your salary is higher or lower than Rs 15,000 in a month.
Gross salary is 6000/
Basic salary is 3000/
No DA
What will be Pf deduction & employers contribution ?
PF = (Gross – House Rent Allowance) x 12%
Basic 4500
DA 2000
HRA 1500
Special Allowance – 3500
Bonus – 1000
Total Gross – 12500
Total PF Gross – 10,000 – Is this correct?
Opt 1 :
I could pay 10,000 * 12% as PF
OR
Opt 2 :
I could pay 6500 * 12% (PF Max and not on PF Gross) as PF
Are both these options oK?
Total PF Gross – 10,000 – Is this correct?
Ans: I see that you have excluded both HRA and Bonus from gross salary for the purpose of PF calculation. I don’t see a problem in excluding HRA.
While “Bonus” is excluded for PF, I wouldn’t comfortable with excluding a fixed pay from PF just by naming it Bonus. Bonus, in order to be excluded from PF, should be statutory bonus or something which is performance based (variable pay) and not a fixed pay which is paid out each month.
Are both these options oK?
Ans: Option 2 cannot be considered since the limit of Rs 6,500 is no longer applicable. The current limit is Rs 15,000 per month.
I would consider Option 1 after deciding on whether or not to include Bonus.
If an employee’s salary breakup is as follows
Basic 6150
HRA 3075
Lunch Allowance 2200
Transport Allowance 1600
Medical allowance 1250
Special Allowance 1750
Should we consider Basic+lunch allowance+Transport allowance+Medical allowance+Special allowance as PF gross which comes to 12950 and hence should the PF to be deducted is 12%* of 12950 which is 1554. Please advise.
Correct. The PF shall be 12% of Rs 12,950.
Dear Sir,
We have started new contract of loading & unloading of materials job in one particular Industry. We have 150 non permanent labours. They come to work only if the Industrial Plant running. Industrial Plant Shutdowns maximum half of the month. So they come to work only 15 to 20 days per month. But their earning per day is between 700 to 1200 depending upon the upon the bags they loaded & unloaded(approximately more or less 900 per day)
For example, Total wages of one labour for one month is 12410 meanwhile working days of same labour is only 14. They don’t have PF a/c in any previous employment.
Now Weather it is mandatory to deduct PF from their salary because their wages is below Rs.15000 or can I exempt them from PF liability by showing their Absence as a loss of pay?
It is mandatory to include the workers for PF unless you have legal reason otherwise. Please do not exclude them from PF.
Pension 17500 please tell me whats basic on this and all catgary finde out an apply 7th pay this ofyer that…
Your question is not clear. Please rephrase it.
if gross salary is 6500/- how much deducted from employee and how much contribution from employer .
I presume the gross salary of Rs 6500 includes HRA. Hence, Employer and employee PF = (Gross salary minus HRA) X 12%.
Hi, During full and final settlement of an employee, whether leave en cashment wages have to be included in PF wages for calculating PF deduction for that month.
Leave encashment amount should not be included for PF calculation.
Calculation of PF contribution on PF Gross Part I & II are based on WAGE CEILING of Rs. 6,500/- which has been revised to Rs. 15,000/-. Hence, as per the subject Blog, the Contribution as on date should henceforth be calculated on Rs. 15,000/- since the PF Gross includes all Allowances except the excluded heads in definition of Basic Wages.
Under such circumstances, the take home for the lower salary employees would definitely be affected to a very great extent. Can you justify the same.
PF is a statutory requirement and hence we are nobody to justify the same.
I have 16k take home salary. I want to know adout my pf and total salary description. Will you help me
Pls let us know your gross pay breakup.
Hi,
spacematrix design consultants, the PF is fixed at 1800/- per month onyl. slightly confusing, what are exact rule for calculating -any idea, it is definitely not 12* of basis.
PF is typically calculated as 12% of (Gross PAY – HRA).
I am getting Gross salary of Rs.29000(Basic-13000+HRA-13000+Other Allowences-3000)
My Question is i do not want to be a PF depositor and for the same i discussed with our management and they also ready to do for it but they said is it possible by law then they will do.
So i requested them to Exit my PF in EPFO portal and New Salary structure is as under Basic – 17400 and HRA – 11600
Can i do this as above?
Please help me out of this.
Please dont say PF is long-term asset, Its more benefit are there, its good to deduct PF, etc…. I know the benefits of PF but still i dont want to deduct from my salary.
Thanks in advance.
If you were under PF with your current organization in the past, you cannot opt out just because your salary went above Rs 15,000 per month.
If you are a new employee in your company with the salary of Rs 17,400 (Basic) + Rs 11,600 (HRA) and you were not under PF in your earlier organization, you can opt out of PF subject to conditions.
Sir actually my cts is 16,500 bt my take om s 12,500. Can thy deduct 4000 as pf. Plz rply to dis.
We cannot answer this question unless we have the break-up of your salary.
Dear Sir,
I was running a training centre and i was giving a pay of 5000 cross. whether we need to pay them PF, and if so the PF amount is detected from the salary or it is apart from the salary.
Your organization shall come under PF if your organization employs 20 or more employees. PF comprises 2 components – employee contribution, by way of salary deduction and employer contribution, by way of a payment by the employer.
Hi
I am running a restaurant where 8 employees are there including partners.if it necessary to take pf and ESI registration as per the new wage ceiling limit. I am paying their salry through bank transfer. Two three are above 15000 and others are below 15000. How much should go to basic n hra and others.can u pls explain.i read if members are below 10 should pay 10%>
.pls advice
Your organization with an employee strength of 8 shall not come under PF and ESI.
My Salary his 15k includes PF with the special allowance for food, travel and mobile somewhat 2300 rs then how much will they deduct from my salary as PF
The PF deduction shall be 12% of Rs 15,000.
I have an query that , if the gross salary is less then 15000.
a) PF can be deducted on 15000 of gross salary except HRA in 15000 ?
or
b) can we deduct on basic + DA of 15000 ?
for example :
a) 15000 of gross salary , 3000 of HRA
15000-3000(HRA) =12000*12%=1440
or
b) 15000*60%(Basic+Da) = 9000*12%=1080.
which one is correct ,Please suggest PF GO/Circular.
Thanks in Advance
Answer: Option a)
Recently Supreme Court has made judgement on P.F. Calculation , 28 Feb-2019 to be precise.
It says P.F. will be calculated on Gross Salary . Kindly enlighten what will be the impact of this judgement on working class people especially in private sector.
The Supreme Court judgement reinforces what the PF department has been saying all along that PF should be calculated on gross pay (after leaving out exempted heads of pay such as HRA) and not just on Basic head of pay.
https://www.hinote.in/calculate-pf-on-gross-pay-and-not-basic-head-of-pay-part-i
https://www.hinote.in/calculate-pf-on-gross-pay-and-not-on-basic-head-of-pay-part-ii
Dear sir
I was join Gurunanak workshop services p ltd on 29 June 2018 my employer is paying salary me to Basis Wages Rs.20000 and special allowance Rs. 15000 sir please guide me as per epf And misc Act I will be cover under th pf act or not. And please provide me computation of pf contribution sheet.
Thanks And Regards
Anil
7014052140
If your employer is covered under PF, you will have to come under PF.
If basic is 4000 and special allowance is 7685 what will be pf amount
PF contribution =12% x (4,000 + 7,685)