“The best things in life are free, yet eventually the authorities will figure out how to tax them!”

Introduction: We all know that PF is mandatory for organizations with employees over 20, but did you every wonder how this 20 plus is computed?  For example, a company has got 5 employees on roll and contract employees of 17 which include housekeeping, security personnel and manpower on contract.  Include Directors drawing salary in the head count.   PF applicability is not based on employees on roll alone (in this case, 5 employees). For PF ceiling limit, include contract employees (17 personnel) as well as Directors drawing a salary. 

PF Calculation: PF contribution is applicable on basic+ DA.  The employer contribution is 12%+1% (administrative charges) of basic + DA.  The employee contribution is the same, that is 12% of basic + DA.  In India the usually practiced norm is that basic + DA constitutes 30% to 50% of gross salary.  The ceiling limit for PF applicability is Rs. 15,000/- (basic +DA).

Example: Now let us see what happens when the ceiling limit exceeds Rs. 15,000/-, is PF paid or not?  Here the employee can exercise an option not to have PF by filing Form-11.  The other option is the company can either restrict PF by limiting basic and DA to within Rs. 15,000/- or it can also opt to pay PF even if the basic and DA exceeds Rs. 15,000/-.

Now let us find out how PF inspectors slap companies with back-dated coverage?

1.      If you have voluntarily applied for PF, during the inspection, salary details are checked from the balance sheet, attendance register and salary statement from the date of inception to the date of PF applicability.  If during any one month in the previous period, the number of employees exceeds 20, the date of PF applicability will be the month during which the number of employees exceeded 20, irrespective if later on, the total strength came down.

2.      When the PF coverage is enforced by law, the coverage is based on the following factors:  The attendance register with the security guard along with contract workers’ register is taken into account.  The company has to produce balance sheet, salary statement, attendance register, professional tax registration copy, professional tax returns, shops& establishment registration copy. This is compared to assess the number of employees for applicability of PF.

3.      Presently, with PF transactions going online, one might wonder on what basis the PF notices are served?  Well, the PF Department has access to professional tax (PT) returns where the number of employees under professional tax is a giveaway.  Shops & establishment registration also reveals the number of employees.  Salary figure in the balance sheet gives a rough estimate of employees.  Inspection of the company which provides the contract employees would also be a source to verify.  Hence, with all these resources available, it is no wonder that the PF Dept is able to slap a notice.  The only way out for the company is to BE AWARE and take appropriate preventive action.

This above is applicable to all types of establishments whether manufacturing, trading, services or otherwise.