Recent circular and intimation from the EPFO (Employees Provident Fund Organisation - which comes under the ministry of labour and employment), asking provident fund benefits to be computed not just on the basic salary and DA (Dearness Allowances) of employees as is currently done. But including all allowances is completely uncalled for.
Reduce Take-Home Salary.!
It will reduce the take home pay of salaried employees. As per this circular, various allowances paid to employees will have to be added back to the basic salary & provident fund contributions computed against this higher value. This, in turn, will mean a lower take home pay. But maximum notional level of Rs. 6,500 per month.
The circular dated November 30, 2012, was issued after internal review meetings held in late November and has been forwarded to EPFO offices across India.
Historically, most companies have been computing provident fund (PF) contributions (at 12 per cent each by the employer & employee) against basic salary and DA only. However, the definition of basic wages has been a contentious issue, with PF authorities claiming that companies split the basic wages into various allowances to reduce the quantum of PF contributions.
Last year (2011), the Madras high court & the Madhya Pradesh high court in 2 separate cases had held that various allowances paid by the employer to its employees under different heads such as conveyance, education, food concession, medical, city compensatory allowance, special holidays, night shift incentives, etc.! qualified as basic wages under section 2 (b) of the PF Act and needed to be included while computing the PF contribution.
Based on these judgements, PF officials carried out audits on India companies and raised demands to recover the differential PF contributions. Later, pending dismissal of the writ petitions filed by these companies, the audits were held in abeyance.
26A of the PF Scheme allows PF contributions by the employee as well as the employees on a maximum notional level of Rs. 6,500 per month, instead of the entire salary (including various allowances). The rate remains the same at 12 per cent the employer and employee contributions respectively.
Not several employers have opted for this route, as PF is part of the employees cost to company and it also gives a tax shield to the employees. Now, if the employer organisation suddenly wishes to exercise this option and compute PF contributions only against Rs.6, 500 per month, it is not clear whether the PF authorities will oblige.
The archaic procedural requirements which have blocked Rs 22,637 crore in inoperative accounts with no claimants.
Consider the present scenario though the EPFO organisation has 616 lakh accounts and a corpus of around Rs. 1,63,000 crore it could pay an interest rate of only 8.5 per cent in 2008 - 09 by using its contingency reserve fund. This interest rate was raised to 9.5 per cent in 2010-11 by utilising funds in the interest suspense account.It reduced to 8.5 per cent in 2011-12 and 8.6% in 2012 - 13.
Contrast, pension fund managers of central government employees under the NPS (New Pension Scheme) were able to efficiently generate higher returns ranging from 8.1 per cent to 16.4 per cent during the same period.
In addition, employees' gains from pension payments made under the provident fund scheme too have been meagre. Numbers for the end of the financial year 2012 show that 410 lakh pensioners received an amount of Rs. 4,475 crore - which translates to an average annual pension of just Rs. 10,900.
Src: TOI
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