Take home salary to shrink

Hyderabad: Take-home salary of employees is likely to reduce considerably if Parliament approves changes to a law governing provident fund contributions. The proposals made by the labour ministry expands the definition of salary to include almost all allowances for the calculation of PF contribution, reducing the net take-home salary. According to the proposals made by the labour ministry in the Employees Provident Funds and Miscellaneous Provisions (Amendment) Bill, 2015, the definition of salary which is used for the deduction of PF contribution has been expanded under the term called Contributing Wages.

The contributing wages would include basic wages and all allowances, except house rent allowance, employer’s contribution for ESI, travel allowance, gratuity and money paid to employee to refund expenses incurred by him while on-duty. At present, the PF contribution is calculated only on the basic wages. If an employee is getting Rs1 lakh gross salary, his remuneration could be divided into say, Rs 40,000 of basic wages, Rs 20,000 house rent allowance, Rs40,000 other allowances. Under the current formula, the PF contribution is calculated on Rs40,000 of basic wages. But under the proposed formula, the contribution would be calculated on Rs80,000. This results into an almost 100 per cent higher contribution by the employee.

The employer’s new PF contribution, however, remains uncertain. Under the existing law, the employer could calculate his contribution (12 per cent) on a maximum Rs15,000 of basic wages, while the employee needs to pay on the actual basic wages.It is still unclear whether the employer would enjoy the same ceiling under the law. If the ceiling is allowed to continue, the employer would be contribute disproportionately lesser than the employee.

However, if the ceiling was discarded, the employee would a huge hike in terms of savings in form of employer’s contribution. The change in the PF contribution formula was made after labour unions sought the ministry to mandate employers to calculate their contribution on the gross salary as against just basic wages. There were also allegations that companies have kept basic wages at low levels to avoid paying higher contribution.