Income tax computation on employer contribution

If the provident fund is statutory provident fund then any contribution from the employer in excess of 12% of salary shall be taxable in the hands of employee.

The defination of salary means basic salary. it also includes dearness aloowance if terms of employment so provide. it also includes commision if it is provided as a fixed percentage of turnover.

therefore if basic salary is 60000 then contribution upto Rs7200(60000*12%) shall be exempt and Rs 700(Rs7900-7200) shall be taxable in the hands of employees.

Also the employee contribution qualifies for deduction under sec80C of the Income tax Act 1961.

Thanks Saket,

But there is a confusion on definition of Basic Salary. is it restricted to 6500.00 or its just Basic Salary (Including DA) of any amount.

Regards

Navin

An employee of the Company to whom the following condition apply at the time of joining the services of the Company shall be an excluded employee.

a)    His/Her Pay is more than Rs. 6500/- per month

Pay’ includes basic wages with dearness allowance, retaining allowance, (if any) and cash value of food concessions admissible thereon and leave encashment.

Both the employees and employer contribute to the fund at the rate of 12% of the basic wages, dearness allowance and retaining allowance, if any, payable to employees per month.

12% of the Pay

*   “Pay” includes basic wages^# with dearness allowance, retaining allowance** (if any), and cash value of food concession and leave encashment.

# Basic Wages means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include-

• the cash value of any food concession;
• any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), house-rent allowance, over-time allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;
• Any presents made by the employer

** Retaining allowance means allowance payable for the time being to an employee of any factory or other establishment during any period in which the establishment is not working, for retaining his service

If 12% of Basic head of pay is greater than Rs 780, then PF contribution = 12% of Basic head of pay, else PF contribution = 12% of PF Gross.

For example, let us assume that an employee receives Rs 10,000 per month under the Basic head of pay. Since his PF is Rs 1,200 (12% of Rs 10,000), which is well above Rs 780, the PF contribution can continue to be calculated as 12% of Basic.

In case the employee receives Rs 3,000 under Basic and Rs 3,000 under “Special Allowance,” a head of pay which should be in PF Gross, the PF contribution cannot be calculated as 12% of Rs 3,000 but should be calculated as 12% of Rs 6,000, which is Rs 720.

Please note that even if you are calculating PF only on restricted Basic (Rs 6,500) instead of full Basic (the actual Basic amount), the PF calculation should be on PF Gross instead of Basic head of pay in case PF contribution falls below Rs 780.