Provident Fund Laws: Clarification on Special Allowances – Turbulence in Industry

Background to Apex Court Ruling

Recently, the Supreme Court of India (“Apex Court”) has clarified the principle of special allowances in the case of The Regional Provident Fund Commissioner (II) West Bengal Vs Vivekananda Vidyamandir & Others in Civil Appeal No. 6221 of 2011 by interpreting and having a conjoint reading of “basic wage” under section 2(b) and contributions and matters which may be provided in the scheme under section 6 of the Employees’ Provident Fund and Miscellaneous Provision Act, 1952 (“Act”). The Apex Court by way of rule of harmonious construction read and interpreted the aforesaid section as a whole with the aim of avoiding inconsistencies or repugnancy between various sections or parts of the statute. The Apex Court observed that the Act is a beneficial social welfare legislation and must be interpreted as such.

The present judgment of the Apex Court arose from appeals that were clubbed and referred to the Apex Court for determination of a common question of law. The said appeals were filed by entities in different industries where the different allowances have been treated differently by industries and accordingly the competent authorities have either held them as a part of Special Allowances to be included in the basic wages for deduction of provident fund or partially allowed them to exclude from the definition of Special Allowances, hence, exclude from the definition of basic wages.

In the appeals referred to Apex Court, some of these allowances were incentive to teaching and non-teaching staff[1], variable dearness allowance, house-rent allowance, travel allowance, canteen allowance, lunch inventive[2], special allowance, management allowance and conveyance allowance[3], education allowances, food concession, medical allowances, special holidays, night shift incentive, city compensatory allowance[4].

The question before the Apex Court was whether allowances including special allowances could fall within the ambit of “basic wages” under the Act for the purposes of determining provident fund contribution liability.

Dealing with Past Rulings by Apex Court

The Apex Court has also dealt with the earlier cases and the principles laid down therein before dealing with the cases in hand.

  • In the case of Bridge and Roof Co. (India) ltd. vs. Union of India (1963) 3 SCR 978, the Apex Court has dealt with the issue of dearness allowance:
    1. It seems that the basis of inclusion of dearness allowance in section 6 of the Act and exclusion in clause (ii) is that whatever is payable in all concerns and is earned by all permanent employees is included for the purpose of contribution under section 6, but whatever is not payable by all concerns or may not be earned by all employees of a concern is excluded for the purpose of contribution.
    2. To this the exclusion of dearness allowance in clause (ii) is an exception. But that exception has been corrected by including dearness allowance in section 6 of the Act for the purpose of contribution. Dearness allowance which is an exception in the definition of ‘’basic wages’’, is included for the purpose of contribution by section 6 and the real exceptions therefore in clause (ii) are the other exceptions beside dearness allowance, which has been included through section 6.
  • In the case of Muir Mills Co. ltd., Kanpur vs. Its Workmen, AIR 1960 SC 985:

The principle of variation was explained. Any variable earning which may vary from individual to individual according to their efficiency and diligence will stand excluded from the term “basic wage”.

  • In the case of Manipal Academy of Higher Education vs. Provident Fund Commissioner, (2008) 5 SCC 428:
    1. Any wage which is universally paid across the board will become a part of basic wage. Such emoluments will become a part of basic wages.
    2. In case if the payment is available to be specifically paid to those who avail of the opportunity, is not basic wages even though it is applicable to all. For example, overtime allowance.
  • In the case of Kichha Sugar Company Limited Through General Manager vs. Tarai Chini Mill Majdoor Union, Uttarakhand, (2014) 4 SCC 37:

It was observed that where the payment is available to those who avail the opportunity more than others the amount paid for that cannot be included in basic wages. For example, overtime allowance, leave encashment, extra bonus since these are variable in nature.

Test to be Cleared to be treated as Special Allowances:

In view of the above cases and facts of the five current cases under appeals, the Apex Court held that in order for special allowance to qualify as incentive based pay, following elements were missing:

  1. The allowances paid to its employees were neither variable nor linked to any incentive for production resulting in greater output.
  2. The allowances were paid across the board to all employees in a particular category.
  3. The allowances were being paid specifically to those who avail the opportunity was also not reflected.
  4. The allowances paid in question were essentially a part of basic wages camouflaged as a part of an allowance so as to avoid deduction and contribution to Provident Fund.

Hence, it would form a part of basic wages and contribution is entitled to be deducted under the Act.

Impact of the Apex Court ruling:

  1. Lower Take Home Salary: Companies paying various ad-hoc allowances with/without any basis to all the employees with the purpose of paying higher take home salary would be reduced and companies would be forced to deduct PF contribution from these allowances if they are not legitimate and do not fall within the ambit of special allowances.
  2. Reduce frivolous litigation: The current litigations pending before different courts and competent authorities will be resolved expeditiously either by the authorities or by the industry (by ensuring compliance and paying fines rather than litigating) in view of the Apex Court ruling.
  3. PF Authorities more vigilant: Employees’ Provident Fund authorities would further be armed with the Apex Court’s clarificatory ruling which would enable them to initiate more enquiries against the companies who are paying salary to its employees with various types of unqualified allowances.
  4. Implementation of Court ruling Prospective vs Retrospective: Companies are struggling to figure out whether to change the current compensation structures of its employees. It depends on facts of each company and on what basis their current Cost to Company structures (CTC) are designed. Any change to current structure would lead to questioning the practice being followed till date as incorrect and will have huge financial burden on the companies. The Apex Court judgment is clarificatory in nature and reiterates the principles laid down earlier. Hence the question of prospective and retrospective does not arise and in case companies’ current practice is not compliant under the Act, they will face the consequences as laid down under the Act.
  5. Auditors Vs Companies – Contingent Liability vs Provision for labilities: Companies changing their current practices in order to comply with the principles laid down in the Apex Court judgment will make them compliant prospectively only. At this stage it would be premature and difficult for companies to determine any financial liability, unless they themselves admit that a particular allowance shall not qualify as special allowances or assessed by the competent authority. In my personal view, companies should wait as of now and only factor amount of financial liability as contingent liability vs provision upon show cause notice being issued by the competent authority mentioned the basis of the liability (whether legitimate or not) till such time continue to ensure compliances under the Act.

Nitin Jain | Partner


[1] RPFC vs. Vivekananda Vidyamandir and Others Civil Appeal No. 6221 of 2011.
[2] Surya Roshni ltd. vs. Employees Provident Fund and Others, Civil Appeal No. 3965-3966 of 2013.
[3] U-flex Ltd. vs. Employees Provident Fund and Another, Civil Appeal No. 3969-3970 of 2013.
[4] The Management of Saint-Gobain Glass India Ltd. vs. RPFC, EPFO, Transfer Case (C.) No.1273 of 2013.

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