The Employees Provident Fund Organization(EPFO) readying to re-notify a new definition of “compensation” that will include all allowances. Currently, employers contribute only 12% of the basic salary and dearness allowance, which in fact is not paid by most companies currently, towards their share of “matching” provident fund and the Employees Pension Scheme contribution. Hence, for several thousands of employees, the basic salary actually remains constant, while increments are passed by way of enhanced or new allowances. In most cases, the tax liability for the employee goes up due to the salary hike ” and companies earn tax credits on salary-related expenses over the same ” however the statutory provident fund contribution remains unchanged in most cases.
As a result of the above stated logic, EPFO had notified similar changes last year. They had to withdraw the circular in the wake of protests from employers and the perception that take-home salaries would come down. The industry continues to resist the move, but this time on, the EPFO is expected to go ahead with the above plan, as a panel which was set up by the labour ministry to vet this proposal, has endorsed it.
The report is currently pending with the labour ministry but sources have said that the government will go ahead and notify the norms.
