Your take home salary and Provident Fund contributions are likely to be impacted as the Supreme Court on Thursday ruled that 'special allowance' must be included in basic pay for calculation of provident fund (PF) deduction from employees and the company. The apex court has ruled that employers cannot segregate 'special allowance' from basic wages for purpose of PF deductions.

A bench of Justices Arun Mishra and Naveen Sinha on February 28 ruled that employers cannot segregate 'special allowance' from basic wages for purpose of PF deductions.

The court was hearing a clutch of appeals questioning whether "the special allowances paid by an establishment to its employees would fall within the expression "basic wages" under Section 2(b)(ii) read with Section 6 of the Act for computation of deduction towards Provident Fund".

A bench comprising justices Arun Mishra and Navin Sinha dismissed the appeals filed by several companies challenging the decision of the Provident Fund Commissioner clubbing basic pay with special allowances for deduction towards provident fund.

It, however, allowed the appeal filed by West Bengal's regional provident fund commissioner (II) against the order of a division bench of the Calcutta High Court, which had held that since special allowance was not linked to consumer price index, it did not fall within the definition of "basic wage".

"The wage structure and the components of salary have been examined on facts, both by the authority and the appellate authority under the Act, who have arrived at a factual conclusion that the allowances in question (special allowance) were essentially a part of the basic wage, camouflaged as part of an allowance, so as to avoid deduction and contribution accordingly to the provident fund account of the employees. There is no occasion for us to interfere with the concurrent conclusions of facts," the apex court said in its verdict.

The top court observed that no material was placed by the companies "to demonstrate that the allowances in question being paid to its employees were either variable or were linked to any incentive for production, resulting in greater output by an employee, and that the allowances in question were not paid across the board to all employees in a particular category or were being paid especially to those who avail the opportunity".

(With inputs from agencies)