Navigating PF Contributions

EPFO Clarifies Rules on CTC

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EPFO's Clarification on PF Contributions: Implications for Employers and Employees

In India, "Cost to Company" (CTC) is a commonly used albeit a perplexing term in employment contracts and human resources management to outline the total remuneration and benefits offered to employees. It is often used during salary negotiations and in salary structure given in employment contracts to provide details of the total value of compensation being offered. CTC is also termed as the total salary package and is often erroneously mistaken by employees for the take home salary.

CTC is not explicitly defined in any specific labour laws in India and commonly refers to the total annual cost that the company bears to hire, train, and keep an employee. It encompasses all direct and indirect benefits provided to the employee, forming a comprehensive measure of the employee's total compensation package. The components of CTC typically include:

·       Basic Salary: The core component of an employee's earnings.

·       Allowances: Various allowances such as House Rent allowances, Dearness allowances, Medical allowances, Meal allowances, Travel allowances, Entertainment allowances, Telephone/Mobile/Internet allowances, Leave Travel allowance (LTA), Petrol/Vehicle allowances, Books/periodicals allowances and Special allowances

·       Bonuses and Incentives: Any performance-based bonuses, annual incentives, or additional periodic payments.

·       Employer Contributions: Contributions made by the employer to statutory and non-statutory benefits, such as:

o   Employee Provident Fund (EPF): Contributions towards the employee's provident fund.

o   Gratuity: Lump sum amount payable to the employee at the time of retirement or resignation, as per the Payment of Gratuity Act, 1972.

o   Employee State Insurance (ESI): Contributions towards the Employee State Insurance scheme, as per the Employees' State Insurance Act, 1948.

o   Insurance Benefits: Health insurance, life insurance, and other insurance premiums paid by the employer on behalf of the employee.

o   Perquisites (Perks): Non-monetary benefits such as company-provided accommodation, car, subsidized meals, gym memberships, and other fringe benefits.

o   Other Contributions: Any other financial contributions or reimbursements made by the employer, such as for professional development or relocation expenses.

Companies in India use CTC to determine the total expenditure on employee compensation and for budgeting purposes. It is important to distinguish CTC from the employee's take-home salary, which is lower after taxes and deductions.

Many of the employers in India give the breakup of the outgoings under different heads as CTC in the appointment letter issued to a new employee. As CTC is the total cost, generally on a yearly basis, which an employer incurs on an employee during his employment/ services of his holding office in the company/establishment, it is normally/generally much above the wage ceiling on which Employees Provident Fund (PF) is payable under the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 (EPF Act) and the schemes, which often leads to misinterpretation.

EPFO Clarification dated March 18,2024

As a recent development and for the first time, on March 18,2024, the Employees Provident Fund Organization (EPFO), a statutory body under the Ministry of Labour and Employment, Government of India that administers the PF scheme, has issued Clarification on treatment of CTC by holding that CTC cannot be considered as the basis for PF contribution and the employer's PF contribution mentioned in the CTC is not payable on the entire amount paid on the CTC basis. It was clarified that Section 6 of EPF Act which deals with “contribution” provides that contribution for PF is payable only on basic wages (which excludes HRA, Overtime Allowance, Bonus, Commission etc.), dearness allowance (which includes cash value of any food concession) and retaining allowance, if any.

While distinguishing between the concept of emoluments and wages, the EPFO clarified that emoluments mean all earnings by an employee for the work done by him/her in an establishment and includes bonus, commission etc., whereas, basic wages (as defined in the EPF Act) expressly excludes these items/components. Thus, CTC cannot be therefore construed to mean “emoluments” which are earned by an employee within the meaning of the term “basic wages” as given under section 2(b) of the EPF Act and contribution under section 6 of the Act cannot be thus charged on CTC.

The EPFO further referred to Paragraph 31 of the Employees’ Provident Funds Scheme, 1952 which states that “Notwithstanding any contract to the contrary the employer shall not be entitled to deduct the employer’s contribution from the wage of a member or otherwise to recover it from him.” It was clarified by EPFO that though wage is not defined in the EPF Act or Scheme, when CTC is the sum total of all the earnings of an employee in a year and includes all expenses made by the company on him for his services and contribution as per section 6 of the EPF Act is only on certain components of wage on which PF is deductible / payable by the employer, it can not be alleged that the employer is deducting the employer’s share of contribution towards PF from the wage of the employee or is otherwise recovering it from him and is thereby violating para 31 of the EPF scheme, simply because he/she is showing it as a component of CTC, more so, if he/she is showing the contribution payable by the employer separately in the balance sheet. It is thus not wrong if the employer is showing employer’s share of provident fund contribution as a part of CTC of the employee.

The EPFO concluded that in the view of the above, the employer’s share of PF contribution booked as a part of CTC in respect of the employees by the employer does not tantamount to mean that the employer is deducting employer’s contribution from the salary of the employees. Accordingly, all components of CTC can not be treated as emoluments under section 2(b) of the EPF Act and thee F contribution under Section 6 of the EPF Act is not payable on the entire amount paid on CTC basis.

It was however cautioned by EPFO that under no circumstances, shall the employer be permitted to segregate the CTC/salary into such components so as to bring the amount (of wage), on which contribution is payable by him under section 6 of the EPF Act, below the wage ceiling prevailing.

Anhad Law views

The Clarification is significant for employers in India as well as for PF officials as the EPFO has rightly observed that the CTC is an illusory concept, separate from basic salary and import of section 6 of the EPF Act is not currently understood by some of the employers and PF officers which is many times a cause for unnecessary litigation. It was rightly observed by EPFO that the PF officers in ignorance of law are unwittingly asking employers not only to pay contributions on CTC but are also questioning them on why reflecting of employer’s contribution to PF under CTC be not treated as a deduction by them from employees’ salary and consequently why this be not treated as a violation by the employer of paragraph 31 of the Employees’ Provident Scheme, 1952.

It is expected that post the issuance of the latest clarification by the EPFO addressing common misconceptions on the treatment of CTC, the nebulous concept of CTC and issues arising from payment of contribution on CTC or on basic wage shall be settled for ever, leading to reduction in harassment of employers and the unnecessary litigation on part of PF officials which occur in ignorance of law.

© Ranjan Jha, Partner