Fund contributions must be based on minimum wage

The Employees Provident Fund Organisation of India (EPFO), which manages India’s largest social security fund for employees, has announced that employers are required to make provident fund (PF) contributions on minimum wages.

According to the existing provisions of law, employers must make PF contributions for eligible employees (whether employed directly or through a contractor) on the amount of basic wages (base salary), dearness allowance (which is like a cash allowance paid to an employee on account of inflation) and retaining allowance.

While the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (EPF Act), defines “basic wages”, it does not stipulate that basic wages must be equivalent to minimum wages under the Minimum Wages Act, 1948 (MWA). In addition, it is common to structure a compensation package to include several allowances and perquisites, some of which provide tax benefits. As a result, for employees receiving a minimum wage, the basic wage would typically be an amount lower than the minimum wage rate prescribed by the government under the MWA. This would therefore reduce the PF and pension contributions by the employer as they are linked to the amount of basic wages.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.