June 12, 2019

Popular Misconception on Contributions under the Employees’ Provident Fund Law

- Nandini Saha, Senior Manager, Legal, Company [ ITC Limited ]


The object of the EPF Act must be remembered before making any change to the contributions payable to the Provident Fund. The EPF Act was never intended to Cause hardship to an employee in the present

This article seeks to study the object of the Employees Provident Fund Act, 1952, and the usage of the term “basic wages” in the said Act by analyzing various judgments and labor law enactments. The object of the EPF Act is to facilitate compulsory saving by employees for the future. The current interpretation, however, appears to have broadened the quantum of saving, thereby reducing the present disposable income in the hands of the employee

The name of the enactment in using the term ‘provident’ suggests the purpose of this legislation. The Employees Provident Fund Act 1952 (“EPF Act”) is a legislation facilitating compulsory saving for employees and is designed to induce thrift so that the employee may save from his present earnings a portion for a rainy day or old age.1 The EPF Act and the Employees Provident Fund Scheme, 1952 (“EPF Scheme”) provide for contribution by the employer of a portion of the salary payable to the employee and a deduction of an equal amount from the salary of the employee towards the provident fund.

The EPF Act was the first provision made for workers after their retirement or for their dependents in case of their death2. At the time of its introduction, considering that the Pension Act was not yet enacted, it was the only savings that the worker would have after his retirement.3 The statement of objects and reasons of the EPF Act and the judgments in the 1970’s discussing the EPF Act state that the object of the EPF Act is to provide some amount as savings for difficult times on retirement and in case of death of the employee. It was never intended to create a situation where the money in the hands of the employee is not enough for the employee to sustain himself in the present. This understanding is in line with that of the courts who have stated that although deductions from wages result in saving for the future, any retrospective application of the EPF Act would negatively affect the current life of the employees who anyway live in dire economic need.4

Bearing the intent behind the EPF Act, the interpretation that all the components of the salary are included within the meaning of the term “basic wages” seems problematic. It is believed by most that by including all the components under “basic wages”, the savings of the employee will be more. Further, it is also assumed that employers are deeppocketed, but try to contribute less, and that therefore it is correct to include most of the components under “basic wages”. When interpreting the term “basic wages”, whether the interpretation in reality benefits the employee is a question that should be answered by the employees themselves.

The recent judgment of the Supreme Court in Vivekananda idyamandir5 noted that the authority and appellate authority had examined the wage structure and components of salary and arrived at the factual conclusion that “the allowances in question were essentially a part of the basic wage camouflaged as a part of an allowance so as to avoid deduction and contribution to the provident fund”. The factual findings by the lower authorities were not subsequently controverted before the Supreme Court and therefore the court did not interfere with such findings. In the judgment, the Supreme Court observed that all allowances that are “uniformly paid” would fall within the definition of “basic wages” and only allowances that are variable are excluded from the definition of “basic wages”.

The purpose of this article is to understand whether the present judgment of the Supreme Court in Vivekananda Vidyamandir is consistent with the earlier judgment of this Court in Bridge and Roof Co. (India) Ltd. v. Union of India6 (“Bridge and Roof”) or is it a judgment specific to the facts of that case. Further, it appears that the conclusion in Bridge and Roof is very different from what is quoted from Bridge and Roof in later judgments including Vivekananda Vidyamandir.


Basic Wages, Wages, Minimum Wages, Salary - Similar Not Same

The primary question in understanding the purpose of the EPF Act lies in understanding the meaning of “basic wages”. “Basic wages” is defined under Section 2(b) of the EPF Act. Amongst the many different labor legislations, it is only the EPF Act that uses the term “basic wages”. Different labor legislations use similar terms such as “wages” and “minimum wage” but not “basic wage”. When the EPF Act was enacted, the term “wages” was already defined under the Payment of Wages Act, 1936 and the Industrial Disputes Act, 1947. However, the term “wages” was not borrowed from the existing legislations and instead the term “basic wages” was used, clearly indicating a legislative intent to provide a meaning different from that of “wages”.7

Post the enactment of the EPF Act, the Payment of Gratuity Act, 1972 came into being which again uses the term “wages”8. This further reinforces the view that the legislators had something very specific in mind in introducing the word “basic” in “basic wages” under the EPF Act.

EPF Act – Quantum of Contribution

The quantum of contribution to the Provident Fund is derived from Section 6 of the EPF Act. Section 6 of the EPF Act provides that the employer shall make a contribution of 12% of the basic wages, dearness allowance and retaining allowance, to the provident fund (“Employer’s Contribution”) and an amount equal to Employer’s Contribution is to be contributed by the employee. Such contribution may be deducted by the employer from the salary of the employee.

The Supreme Court in Bridge and Roof observed that there is a contradiction in the language used in the EPF Act. According to the Court, “though the definition [of basic wages] includes “all emoluments” which are paid or payable in cash, the exception excludes the cash value of any food concession, which in any case was not payable in cash. The exceptions therefore do not seem to follow any logical pattern which would be in consonance with the main definition.”9

The contradictions in understanding the meaning of ‘basic wages’ lead to uncertainty in implementing the EPF Scheme and in turn, disputes. The recent judgments on these disputes seem to treat the Employer’s contribution more like a tax, even though it was intended to be a contribution to saving for the employee, and never as a tax on the employer.

Bridge and Roof

On the issue of “basic wages”, the judgment that is referred to time and again is the constitution bench judgment of the Supreme Court in Bridge and Roof. This judgment interpreted the term “basic wages” and held that ‘production bonus’ would not fall under the definition of “basic wages”. The Court rejected the contention that only the bonus payable under the Payment of Bonus Act was excluded and held that ‘production bonus’ is also excluded. The Court in coming to the conclusion made ‘by the way’ statements which have been continuously quoted by later judgments including Vivekananda Vidyamandir. Since the issue involved in Bridge and Roof was only production bonus, this judgment cannot be taken as binding for other allowances. But even if the same logic is followed, all allowances except dearness allowance should be excluded from the definition of “basic wages”. In paragraph 11 of the judgment, the Court has considered an argument that is relevant for the discussion in this article.

“11. This brings us to the consideration of the contention raised on behalf of the respondents that wages are the price for labor and arise out, of contract and that whatever is the price for labor and arises out of contract, was intended to be included in the definition of “basic wages” in Section 2(b), and that only those things were excluded which were a reward for labor not arising out of the contract of employment but depending on various other considerations like profit or attendance. It may be, as we have pointed out earlier, that if there were no exceptions to the main part of the definition in Section 2(b), whatever was payable in cash as price for labor and arose out of contract would be included in the term “basic wages”, and that reward for labor of which did not arise on contract might not be included in the definition. But the main part of the definition is subject to exceptions in clause (ii), and these exceptions clearly show that they include even the price for labor. It is, therefore, not possible to accept the contention on behalf of the respondents that whatever is the price for labor and arises out of the contract is included in the definition of “basic wages” and therefore production bonus which is a kind of incentive wage would be included.” (emphasis supplied).

The categorical statement of the Court has not been considered in any of the subsequent judgments, though many of them have followed Bridge and Roof.

Vivekananda Vidyamandir – A critique

The judgment of the Supreme Court in Vivekananda Vidyamandir10 is the genesis for this article. The issue in this case was whether special allowances paid by an establishment to its employees would fall within the definition of “basic wages” for computation of deduction towards the Provident Fund. The Supreme Court held that all allowances which are “ordinarily, necessarily and uniformly” paid to all employees would come under the definition of “basic wages” and only allowances that are variable are excluded from the definition of “basic wages”.

There were five appeals before the Supreme Court in Vivekananda Vidyamandir, one of which was Montage Enterprises11. It is after Montage Enterprises that the Provident Fund department (“PF Department”) issued a circular dated 30.11.2012 stating that all allowances “ordinarily, necessarily and uniformly” paid will be included in the definition of “basic wages” for the purpose of provident fund and only the allowances specifically excluded from the definition would be excepted.

In Vivekananda Vidyamandir, the Court did not refer to the said Circular dated 30.11.2012. Its conclusion, that all allowances which are “ordinarily, necessarily and uniformly” paid to all employees would come under the definition of “basic wages”, was rejected in Bridge and Roof in the paragraph quoted above.12 It appears that this specific paragraph was not taken into account by the Court.

Further, the PF Department must take into account the meaning given to the term “basic wages” through previous departmental Circulars. The Supreme Court has held that “administrative construction … should be clearly wrong before it is overturned; such a construction, commonly referred to as practical construction, although non-controlling, is nevertheless entitled to considerable weight; it is highly persuasive”13. A previous Circular dealing with the meaning of “basic wages” has held many allowances such as, ‘subsistence allowance’, ‘tiffin allowance’, ‘wages paid for holidays’, ‘special allowance’ etc. are not part of “basic wages”14, but this Circular was not dealt with when issuing the said Circular dated 30.11.2012 or brought to the notice of the Court in Vivekananda Vidyamandir. The PF Department ought not to change its view on the meanings earlier provided through Circulars over a period of time without dealing with the earlier Circulars as this leads to confusion. The object of the EPF Act was never to create any hardship on the employer or employee by virtue of the obligations under the EPF Act, but varied administrative interpretations create an unplanned financial burden on employers who may fail to meet such revised obligations.

The Court also did not interfere with the conclusion of the authorities that allowances were basically part of the “basic wages” camouflaged as an allowance so as to avoid contribution to the Provident Fund by stating that “there is no occasion for us to interfere with the concurrent conclusion of facts.” The petitioners had not shown anything to disprove this allegation. Moreover, employees who would be affected by such an interpretation were not present before this Court. In Bridge and Roof, the Trade Unions were representing the interest of the employees before the Court. The presence of such employees is a sine qua non, as it is their interest which is affected. The salary or wages paid to an employee is an agreement between the employer and employee. Such salary is inclusive of the taxes and any contribution to be made by the employer and employee. Any revised understanding with regard to the quantum of contribution primarily affects the employee concerned. The effect of the judgment in Vivekananda Vidyamandir may increase the contributions of the employer and employee and consequently reduce the disposable income in the hands of the employee. Therefore, the presence of the affected employees before the Court was of paramount importance.

If employees or workmen are required to spare a significant part of their salary towards the contribution, an increase in the quantum of contribution would negatively affect their present economic situation. It is pertinent to note that money saved in Provident Fund can be used by the workman before his retirement only for specific purposes such as for building or purchasing a dwelling house, marriage of certain relations etc., however, in today’s day and age, there are other basic requirements like a small vehicle for which the workman cannot touch the fund although it may be an absolute necessity for him.

The EPF Act is the only enactment which uses the term “basic wages” which would mean that the intention was never to include a substantial part of or the entire wages but only a basic amount. The employee may want to live a better life in the present instead of saving a substantial amount which he may have no use for in the future. The Employer’s Contribution and Employee’s Contribution are both part of the salary agreed upon by the employer and employee and not any additional money contributed by either parties. Therefore, in the hands of the employee, the disposable income is only what is given after deducting all taxes and such contribution. By including every component under “basic wages”, the authorities reduce the money that the employee thought he will be receiving based on the contract between the employer and employee. The employee must have a say in such matters as it is he who is affected by not having enough disposable income. The PF Department must not interfere in the component of wages, which is the domain of the employee and the authorities under the Payment of Wages Act, 1936 and Industrial Disputes Act, 1947.

The wages or salary payable by the employer is negotiated between the employer and employee in terms of Long Term Agreements (“LTA”) or appointment letters. The PF Department is a third party to such an arrangement and should not interfere. The contributions made to the provident fund are exempted up to the limit prescribed under Section 80C of the Income Tax Act, 1961, and the remainder will be subjected to tax. This further clearly shows that the Employer’s Contribution is also a component of the salary (or income) in the hands of the employee.

Implementation of the view adopted by the PF Department and asking the employers to contribute sums in excess of the amounts agreed between the employers and employees would result in the employers being asked to pay more than the compensation they had negotiated with their employees. Therefore, the employers would be compelled to rearrange the wages such that the total outlay is equal to the compensation earlier agreed upon between them. The employers will also have to deduct additional amounts from employee’s salary as employee contribution, and such deduction would amount to violation of the LTA’s, which is not permitted under the Industrial Disputes Act, 1947. Rearrangement of wages and higher deduction, in variance of what was agreed under LTA would result in industrial unrest. Additionally, there will be an unanticipated financial burden on the employer, which is not the purpose of the EPF Act.15

Retrospective effect

It is being discussed in many quarters that based on the revised understanding, the PF Department could demand contributions from the employers from a past date. A combined reading of paragraphs 29, 30 and 32 of the EPF Scheme makes out the following: (a) The contribution payable by the employer is 12% of the basic wages, dearness allowance and retaining allowance; (b) The contribution payable by the employee shall be equal to the contribution payable by the employer in respect of such employee; (c) The employer shall pay the employer’s contribution as well as the employee’s contribution at the first instance; (d) The employee’s contribution is recoverable by the employer only from the wages and not otherwise; (e) No such deduction may be made from any wage other than that which is paid in respect of the period.

Therefore, the EPF Scheme does not contemplate any retrospective operation of the contributions or deductions. The EPF Scheme contemplates that all the above activities are required to be performed as a whole and not in pieces.16 If the employer cannot recover a part of the employee’s contribution by reason of the fact that such a demand arises out of a different interpretation placed by the PF Department (and not by the employee – who is required to point it out immediately upon such deduction), the employer cannot be asked to pay such higher employee’s contribution. Since the employer’s contribution should be equal to the employee’s contribution, the employer cannot be asked to pay more towards the employer’s contribution as this would be a burden on the employer, which as noted earlier, is not the intention of the EPF Act. All these confusions would be redundant, if the contributions and deductions are required to be made prospectively.

The Supreme Court in earlier judgments has categorically stated that despite the finding there must not be any retrospective application of the judgment as it would cause hardship to the employer and employee.17 In Lijjat Papad, the Supreme Court has clearly stated that its judgment should not have any retrospective effect as it would cause immense hardship not only to the employer but also the poor employees who live almost on a hand-tomouth basis.18 Therefore, even if the interpretation placed by the Provident Department is correct, the employer and employee should be given adequate time to renegotiate the salary components.


The object of the EPF Act must be remembered before making any change to the contributions payable to the Provident Fund. There seems to be an opinion amongst the authorities that they are helping the employees by increasing the contributions, but it is only the employees who can decide the same. Any decision in this regard whether by authorities or the courts must have the affected employees/unions present before them. The implementation of the EPF Act which is to help employees, should not in reality cause hardship or unrest amongst employees. The PF Department in making any changes to the understanding of “basic wages” should go by the understanding between the employers and employees. If any interpretation is necessitated that is different from what has been agreed by the parties in the LTA or employment contracts, the parties should be advised of such position and requested to change the same at the earliest possible opportunity. There should also be a rationale for increasing the contribution, if for example, it is found that the sums saved in Provident Fund are not capable of meeting any person’s basic retirement needs, despite pension etc. and the employee will not be negatively affected by such added contribution then only should such changes be made. It must be remembered that the EPF Act was never intended to cause hardship to an employee in the present.

* Nandini Saha is an alumnus of the National Law School of India University, Bangalore.
1 Burhanpur Tapti Mills Ltd. v. Burhanpur Tapti Mills Mazdoor Sangh, 1965 I LLJ 453 (S.C. 3J).
2 The first Employees’ Family Pension Scheme came into existence in 1971 and Payment of Gratuity Act in 1972.
3 Statement of Objects and Reasons, EPF Act.
4 Shri Mahila Griha Udyog Lijjat Papad v. Union of India and Ors., (1999) 6 SCC 38 (S.C. 2J).
5 The Regional Provident Fund Commissioner v. Vivekananda Vidyamandir, 2019 SCC OnLine SC 291.
6 Bridge and Roof Co. (India) Ltd. v. Union of India, (1963) 3SCR 978.
7 The Payment of Wages Act, 1936 under Section 2(iv) defines “wages” to cover a wide ambit of payments made with certain exceptions. Such a definition under the Industrial Disputes Act would consequently mean that all allowances are also included within the term “wages”, however, there is an important qualification to earn such wages, which is provided in the definition itself as, “if the terms of employment, expressed or implied, were fulfilled.”
8 Payment of Gratuity Act, 1972 under Section 2(s) defines wages as “all emoluments which are earned by the employee” but excluding certain components such as house rent allowance, overtime wages, and “any other allowance”.
9 Id at 6, Para 7.
10 Id at 5.
11 Montage Enterprises Pvt. Ltd. v. Employees Provident Fund, Indore and Another, 2011 LLR 867.
12 Id. at 6, Para 11.
13 K.P. Varghese v. Income Tax Officer, Ernakulam and Ors. 1981 4 SCC 173, at Para 11.
14 Refer C.P.F.C.’s Circular No. SS-107 (6) 4/58, dated the 29th August, 1962 and E. 16/(11)/65, dated the 17th November, 1969.
15 The Provident Fund Inspector v. T.S. Hariharan, (1971) 1 LLJ 416 at Para 8.
16 Please See Dharani Sugars and Chemicals Ltd. v. Union of India, 2019 SCC OnLine SC 460, in which it was stated that “If a statute confers power to do a particular act and has laid down the method in which that power has to be exercised, it necessarily prohibits the doing of the act in any manner other than that which has been prescribed.” In stating the same it referred to the law as laid down in State of U.P. v. Singhara Singh, (1964) 4 SCR 485 and Taylor v. Taylor, (1875) 1 Ch.D 426.
17 District Exhibitors Association, Muzzafarnagar v. Union of India, (1991) II LLJ 115 SC.
18 Shri Mahila Griha Udyog Lijjat Papad v. Union of India, (1999) 6 SCC 38. In Jyothi Home Industries v. Regional Provident Fund Commissioner, (1994) I LLJ 49 Kant., where the implementation of the notification issued by the PF Department was stayed by the High Court, the Karnataka High Court directed that the Notification be implemented with effect only from the date of the final order passed by the Single Judge.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.


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