Will variable pay and bonus be included in salary for EPF calculation under new labour codes?

According to Balasubramanian A, senior vice president, TeamLease Services, the inclusion depends on how a company structures compensation

India’s four labour codes came into effect on November 21, consolidating 29 legacy laws into a single framework governing wages, industrial relations, social security and workplace safety. For employees, the most immediate concern is the impact on take-home pay because Employees' Provident Fund (EPF) contributions will now be calculated on a salary that must be at least 50% of CTC (Cost-to-Company).

Currently, EPF deduction is based on basic salary plus dearness allowance. Both the employee and the employer contribute 12 percent of this amount.

But as one dives deeper, a more nuanced question emerges: Will variable pay and bonuses also get counted as part of ‘wages’ when computing Employees Provident Fund (EPF)? The answer matters because it determines how much of your salary gets locked into long-term savings versus what comes to you as monthly cash flow.

Do variable pay and bonuses get included?

According to Balasubramanian A, senior vice president, TeamLease Services, the inclusion depends on how a company structures compensation. “Yes, if variable pay is part of CTC, it should be considered for PF wage calculation,” he said.

This means employees with large performance-linked components could see significantly higher PF deductions. However, the interpretation is far from settled.

Kartik Narayan, CEO ,Jobs Marketplace, Apna, added, “Everyone is waiting for further clarity on this. Variable pay and bonuses are treated differently across companies. For instance, percentage-of-sales incentives may not be counted as wages, while some bonuses are included in CTC. These grey areas need clarification and will likely evolve. Only once the final guidelines are issued will we know the exact treatment.”

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What changes for employees right now?

At present, EPF contributions are calculated on basic salary plus dearness allowance, with both employer and employee contributing 12% each. Under the new wage rules, companies must ensure that wages form at least 50% of CTC, which could pull various allowances including certain bonuses into the PF-eligible bucket if basic pay is not 50%.

However, this does not impact employees who currently contribute only the minimum PF amount.

“If you contribute only the minimum EPF of Rs 1,800 today, you won’t see any change,” Balasubramanian said. Even high earners have flexibility. Employees with larger salaries can still cap their EPF at Rs 1,800 (12% of Rs 15,000) as per the existing rules.

As of now, variable pay and bonuses may be included for PF calculation if they form part of CTC but the final word will come only once the detailed guidelines are understood.