In 2019, the Supreme Court of India in its decision in The Regional Provident Fund (II) West Bengal v. Vivekananda Vidyamandir and Others (SC judgment) has put to rest the confusion regarding the interpretation of the term “basic wages” for the purpose of calculating provident fund (PF) contributions for eligible employees. The Supreme Court has clarified the legal position on whether an allowance paid to employees as part of their total salary, base salary, or cost-to-company would be subject to PF contributions.

The Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 (EPF Act) is an Indian social security legislation applicable to every establishment employing at least 20 employees. According to the law, employers are required to make PF contributions for (a) employees whose pay is up to INR 15,000 (approximately US 215) per month; (b) employees who continue to hold PF accounts based on their previous employment; and (c) international workers (as defined under the EPF Act). According to current law, PF contributions are to be made at the rate of 12 percent (by both the employer and employee) on basic wages, dearness allowance, and retaining allowance.

The term “basic wages” has been under scrutiny for several years, with high courts across various Indian states issuing judgments with their interpretations of the term. The question before these courts has been whether or not particular components of salary—such as special allowance, conveyance allowance, child education allowance, etc.—fall within the scope of “basic wages.” The Supreme Court’s judgment offers clarity by upholding the “principle of universality” and providing the following guidelines to answer this question:

  1. Payments that are universally, necessarily, and ordinarily paid across the board to all employees in a category should fall within the scope of basic wages.
  2. Payments that are variable or are linked to any incentive for production resulting in greater output by an employee should not fall within the scope of basic wages.
  3. Payments that are for special incentives or work should not fall within the scope of basic wages.

Soon after the Supreme Court’s judgment, the Employees’ Provident Fund Organisation has issued a circular dated March 20, 2019, instructing central and regional PF commissioners to take prompt action on the PF issues raised in the Supreme Court’s judgment.


Considering the Supreme Court’s judgment, employers may want to review their existing compensation structures and determine if there are any increased PF liabilities for domestic employees as well as their international workers (expats) in India. For domestic employees (including contract laborers), the employer’s liability to make PF contributions would not extend beyond the current limit of 12 percent of INR 15,000 (approximately US 215) per month, although this monetary limit does not apply to international workers; hence, the risks for those workers may be higher. Moreover, since the EPF Act does not specify any limitation period, the EPFO may enforce the Supreme Court’s judgment retroactively and review contributions made by employers during previous financial years as well. Overall, the Supreme Court’s judgment is likely to increase the amount of PF contributions, which in turn would decrease employees’ current take-home pay but eventually increase their retirement savings.

Written by Archita Mohapatra and Ajay Singh Solanki of Nishith Desai Associates and Roger James of Ogletree Deakins

© 2019 Nishith Desai Associates and Ogletree, Deakins, Nash, Smoak & Stewart, P.C.