Supreme Court Ruling on applicability of PF on allowances

income tax


The Supreme Court verdict dated 28 February 2019 in the case of Regional Provident Fund Commissioner West Bengal v. Vivekananda Vidayamandir and others reiterated the salutary principles of ascertaining components of salary to be considered for the calculation of provident fund (PF) contribution by the employer and deduction from employees’ salary. This can be considered as landmark judgement about applicability of PF considering that it addresses multiple civil petitions pending before the apex court on subject matter and takes into consider all preceding pronouncements on the subject.

Facts of the Case

Multiple appeals before the Supreme Court raised a common question of law whether allowances such as travel allowance, canteen allowance, education allowance, special allowance, conveyance allowance, management allowance etc. paid by an establishment to the employees would fall within the definition of “basic wages” for the purpose of contribution under EPF Act.

Provisions under EPF Act

Basic wage, under section 2(b) of EPF Act has been defined as all emoluments paid in cash to an employee in accordance with the terms of his contract of employment. But it carves out certain exceptions which would not fall within the definition of basic wage and which includes dearness allowance apart from other allowances mentioned therein (i.e. the cash value of food concession, house ­rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment). But this exclusion of dearness allowance finds inclusion in Sec. 6 of EPF Act. The test adopted to determine whether particular allowance to be excluded from basic wage is that the payment under the scheme must have a direct access and linkage to the payment of such special allowance as not being common to all. The crucial test is one of universality.

Arguments before the Hon’ble Court

It was argued that the special allowance paid to the teaching and non­-teaching staff of the respondent school was nothing but camouflaged dearness allowance to reduce the contribution towards EPF. It is to be considered for the purpose of calculating contribution under EPF. The allowance shall fall within the term dearness allowance, irrespective of the nomenclature, since it was being paid to all employees on account of rise in the cost of living.

Ratio/Key Takeaways from the Ruling of Hon’ble Court

  • Basic wages which vary from individual to individual according to their efficiency and diligence will stand excluded for the purpose of computation of contribution towards EPF.  In other words, the allowances in question can be excluded only if; it is variable or linked to any incentive for production resulting in greater output by an employee.
  • Test to be adopted to determine if any payment is to be excluded is that the payment under the scheme must have direct access and linkage to the payment of such special allowance as not being common to allThe crucial test is one of universality.  Where the wage is universally, necessarily and ordinarily paid to all across the board such emoluments are to be considered for the purpose of contribution towards EPF.
  • Where the payment is specially paid to those who avail of the opportunity is not to be considered. Eg. it was held that overtime allowance, though it is generally in force in all concerns is not earned by all employees of a concern. It is also earned in accordance with the terms of the contract of employment but because it may not be earned by all employees of a concern, it is to be excluded. In other words, the amount can be excluded only if it is shown that the workman concerned had become eligible to get this extra amount beyond the normal work which he was otherwise required to put in.


It can be concluded that special allowance or any other allowance, by whatever name called, normally paid by an establishment shall be taken into consideration for the purpose of computation of contribution towards EPF unless; 

  • Allowances are variable in nature; or
  • Allowances which are linked to any incentive for production resulting in greater output by an employee; or
  • Allowances which are not paid across the board to all employees in a particular category; or
  • Allowance which are paid especially to those who avail the opportunity.

This is an important ruling which shall have significant implications for establishment covered under EPF act. The establishments need to revisit and salary and compensation structure in view of aforesaid judgement. It is pertinent to note that employees drawing salary/wages of Rs.15,000 per month are subject to EPF.  

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