Special Allowances Under The EPF Act Need To Be Special

On February 28, 2019, the Supreme Court of India passed a landmark order on whether special allowances fall within the scope and meaning of "basic wages" under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (the "EPF Act"). Under the EPF Act, provident fund contributions of 12% need to be paid by an employer and employee on the employee's basic wages, dearness allowance and any retaining allowance. The definition of basic wages excluded specific categories including overtime allowance, house rent allowance, bonus and the category of "any other allowance payable to the employee in respect of his employment or work done in such employment". Companies typically treat the said carve-out as a 'special allowance', which is not subject to provident fund contributions. While structuring the salary components, special allowance was often 30-40% of an employee's salary, on which they would not remit provident fund contributions.