PF & ESI Compliance

The EPF & MP Act, 1952, and the schemes framed thereunder are meant to provide social security in the form of Provident Fund, Pension and Insurance to all the employees who are employed for wages, in or in connection with the work of an establishment. The Employees Provident Fund Organization is entrusted to administer the Act, and in case of default, the Principal Employer is liable to penal action.

Note: The Code on Social Security, 2020 has been implemented with effect from 21 November 2025. The EPF & MP Act, 1952 continues to operate within this new framework through the savings clauses of the Code.

The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 applies to the factories engaged in industries specified in Schedule I of the Act or to other establishments notified and engaging 20 or more employees. Further, a business entity which is not statutorily required to register can register itself under this Act voluntarily. Therefore, companies with more than 20 employees (including contract workers) compulsorily have to register under the EPF Scheme. Once the entity gets covered under the PF laws, it continues to get covered even if the number of employees drops below 20.

With the Ease of Doing Business initiatives of Government, newly incorporated companies will get EPFO registration number also on the MCA portal at the time of incorporation. Such companies will have to comply under the EPF & MP Act only when they cross the threshold limit of employment.

• The Principal Employer should ensure that the contractor is registered with EPFO before awarding a contract. After the award of the contract, the contractor details should be entered in the EPFO portal.
• Payments due to the contractor should be made only after verifying that the statutory PF payments have been made to EPFO. This can be verified either directly from the EPFO portal or by insisting on a payment receipt obtained by the contractor from the EPFO portal while making payment.
• It is further informed that even if the contractors have a separate PF code number, the overall responsibility of ensuring compliance under the EPF & MP Act, 1952 for the employees working through the contractors, by the deposit of the dues with the EPFO regularly, rests with the Principal Employer.
• The Principal Employer can also deduct EPF dues from the contractors’ bill and deposit the same either against the contractors’ code number or their own code number. It is further informed that there is a provision on the official website of EPFO under the “establishment search” option to verify whether the contractors are regularly depositing Provident Fund contribution in respect of their employees.

All Principal Employers are advised to ensure compliance with the above Circular.

The apex court has held that all ‘allowances’ paid by the employer to its employees will be included in the scope of ‘basic wages’ and hence will be subject to Provident Fund contributions. The Court clarified that only allowances of the following nature can be excluded from ‘basic wages’ for calculation of PF:

• (a) Allowances which are variable in nature; or
• (b) Allowances which are linked to any incentive for production resulting in greater output by an employee.
• (c) 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.
• (d) In order that the amount goes beyond the basic wages, it has to be shown that the workman concerned had become eligible to get this extra amount beyond the normal work which he was otherwise required to put in.

The court opined that those wages which are universally, necessarily and ordinarily paid to all the employees across the board are basic wage. Where the payment is available to those who avail the opportunity more than others, the amount paid for that cannot be included in the basic wage. For example, the overtime allowance, though it is generally enforced across the board, is not earned by all employees equally. Overtime wages or, for that matter, leave encashment may be available to each workman but it may vary from one workman to another. The extra bonus depends upon the extra hour of work done by the workman, whereas leave encashment shall depend upon the number of days of leave available to the workman. Both are variable. Given what we have observed above, we are of the opinion that the amount received as leave encashment and overtime wages is not fit to be included.

At present, an employee contributes 12% of the Basic wages + Dearness allowance + Retaining allowance in EPF.

After the Supreme Court ruling, it is held that the special allowance is part of the basic wages for computing the employee’s provident fund (EPF). The said ruling has changed the PF computation mechanism, thereby it will have a bearing on the net take-home of the employee whose “Basic Salary” is less than Rs. 15,000/- and also increase the Employer PF Contribution Cost. The increase in the PF contribution will ultimately result in an increase in the PF balance in the employees’ EPF account.

A review petition was filed with respect to the 2019 above apex court ruling and the same has been dismissed by the Honourable Court on August 28, 2019.

In the case of International Workers, PF is payable on gross wages. Any person holding a foreign passport (i.e. other than Indian passport) is called an International Worker.

• An employee contributes 12% of the salary for the purpose of PF in EPF.
• The employer also pays 12% of the payout, of which 8.33% of pay is diverted to the Pension Fund and the rest 3.67% is diverted to EPF.
• An employer also pays 0.5% of payout under the EDLI Scheme.

The entire amount is then required to be deposited in the fund within 15 days from the date of such collection.

For every employee, it is mandatory to contribute towards EPF and EPS if his/her wages are below Rs. 15,000 per month. For those earning above Rs. 15,000 it is not compulsory but they may contribute voluntarily. However, in the case where an employee is drawing a salary of more than Rs. 15,000/- he is not required to become a member if he is not already holding PF membership. Otherwise, if both the employer and employee are willing, he can become a member by giving an option under Para 26(6) of the PF Scheme. The option has to be submitted to the EPF office within 6 months of joining of such member.

The Employees’ State Insurance Scheme of India is a multi-dimensional social security scheme tailored to provide socio-economic protection to the ‘employees’ in the organised sector against the events of sickness, maternity, disablement, and death due to employment injury, and to provide medical care to the insured employees and their families.

The ESI Act, 1948, requires every entity, factory, or establishment employing 10 employees or more to register itself with the ESIC. The existing wage limit for coverage under the Act is Rs. 21,000/- per month (with effect from 1.01.2017).

The current ESI contribution rates (effective from 1 July 2019 and applicable for FY 2025-26) are:

• Employer — 3.25%
• Employee — 0.75%
• Total — 4% of wages, payable on or before the 15th of the following month.

If the wages of an employee (excluding remuneration for overtime work) exceed the wage limit prescribed by the Central Government after the start of the contribution period, he continues to be an employee till the end of that contribution period, and the contribution is to be deducted and paid on the total wages earned by him.

There are two contribution periods, each of six months duration, and two corresponding benefit periods, also of six months duration, as under.

Cash benefits under the scheme are generally linked with contributions paid. The benefit period starts three months after the closure of a contribution period. The two types of periods are elucidated below: