Coverage of Employees under Provident Fund Act

Coverage of Employees under Provident
Fund Act
H.L. Kumar, Advocate (Supreme Court), New Delhi.
The Government takes a month’s salary from an employee and asks his employer to pay
another month’s salary every year and buries their contributions in a fund of its own called
Employees’ Provident Fund. But the operation of this fund is not as simple as it is made out to
be. Employees’ Provident Fund Scheme relates to working class that one has to often encounter.
There are estimated to be over 4,40,000 establishments registered with EPFO with more 40
million employees in private sector whereas about 1.5 lakh more have been added by Gazette
notification dated 1.10.2008 as ‘international workers’. According to a recent study carried on by
Xavior Labour Relations Institute the EPFO will bring more employees under its safety net. If
the Scheme as proposed is extended to establishments employing 10 or more employees then
the number of establishments and employees would double from the present level. As far as
the management of the fund is concerned, almost everybody agrees that it is very poorly
managed. Employees or their legal heirs sometimes, have to struggle to recover their own hard
earned money from the fund for years. The decision to bring the international workers working
in India or Indians abroad within the ambit of the Scheme, is being resisted tooth and nail
because they (workers) think that it would be almost next to impossible for them to recover
their money. Most feel disenchanted with covetous and corrupt attitude of the EPFO officials,
their callous and normally perverse bent of mind. But they hardly have any choice. The only
way out is to be fully aware of the complicated laws and their proper compliance.
Here is an apocryphal story: Right from the beginning, Nitin has been a bright student and
invariably topper in a well known public school. Although belonging to the family of
bureaucrats, he opted for MBA and because of his distinctions, he got admission in a prestigious
Business School. Here also, his performance and results were excellent and on campus
recruitment, he was offered a job of Sr. Manager HR and opted to work in the plant so that he
could have direct and practical knowledge about working.
On the very first day, a junior officer from HR Department which was to be headed by him
approached him and asked to fill up certain forms including the one pertaining to his
membership of Employees’ Provident Fund.
After receiving his appointment letter and also signing the nomination Form for gratuity, Nitin
paused for a moment when he saw the Enrolment Form for Employees’ Provident Fund. He
recollected his Business School days when he had been studying labour laws and Employees’
Provident Funds & Miscellaneous Provisions Act as one of the subjects as a social security
legislation. He presumed that only low paid employees will be eligible for membership and
why he should be enrolled when he was drawing a salary of more than half a lakh of rupees per
month. Nitin asked the junior officer as to whether he is legally covered or not under the
Employees’ Provident Fund Act and if not then why he should be covered. The junior officer
was awed and stated “Sir, you should fill up the Form and you will be benefited not only
monetarily but from income-tax point of view also since the contribution as well as interest
accruing thereon will be exempted from income-tax. Every employee/officer irrespective of
his wage/salary is being made as member of Provident Scheme.” Nitin was further confused
and asked as to how much income tax exemption will be applicable if he contributes his share
at 12% of his basic salary over Rs.40,000 per month. Here also, the officer was not clear and
stated “it may be full amount of contribution as well as interest thereon”. Nitin also asked
another question as to whether the company will also be contributing. The junior officer
immediately responded “Yes”. Nitin thought that when the company has been facing aggressive
competition and passing through a difficult period of economic recession, such a heavy financial
burden over and above the salary that too when he does not belong to a weaker section of
All labour laws are supposed
to be the simplest possible but
in reality it is the other way
round. Even the experts - be
it lawyers, trade unionists or
managements all find it too
mind boggling, complex and
entangling like cobwebs. Some
important issues relating to
EPF coverage are examined in
this article.
society, why the Company should contribute for such a heavy
amount - that too every month.
Since Nitin was anxious to know as to whether it could be avoidable,
he referred the Employees’ Provident Funds & Miscellaneous
Provisions Act and on going through the same thoroughly, he
could not make out as to what are the appropriate provisions for
the classification. He contacted the Consultant. On his query, the
Consultant told him that he should sign the Enrolment Form since
he will be benefited. Then Nitin asked, what about the company.
The Consultant said the Company will incur the financial liability
from the very first day. Nitin thought that he should make further
queries from the Income-tax Advisor also and after spending lot
of his precious time, he came to the conclusion that he is an
“excluded employee” and even if he contributes, the income-tax
exemption will be available on interest only on Rs. 6,500 per month.
He could make out that neither the Consultant nor the HR
Department or the Bare Act were clear about the legal implications
of the Employees’ Provident Funds & Miscellaneous Provisions
Act and he recollected the clarifications which he had been able to
get, were never taught at the Business School hence his studies
were half baked and only theoretical.
There are many other HR executives who are not conversant with
the technicalities of the applicability of Employees’ Provident Fund
Act and the coverage of employees notwithstanding that they have
been dealing with such matters but they are ignorant hence effort
has been made to clarify a few aspects which one must know.
If the wage/salary of a new employee is above Rs.6500 per month
and he has not been a member of Employees’ Provident Fund or
being member, has settled his account then he is not to be enrolled
as member of the Scheme. However, if the employer and the
employee both agree, there is no bar in enroling such an
employee as member under the Employees’ Provident Funds
Scheme, 1952. Para 34 of the Employees’ Provident Fund Scheme
provides for a declaration by a person before taking up
employment to state in writing whether or not he is a member of
the Fund and, if so, the relevant details thereof are to be given.
As such for every new appointee, an employer must obtain the
declaration in Form-2 prescribed for this purpose. Upon
enrolment it needs to be submitted as prescribed under Para 33
of Employees’ Provident Funds & Miscellaneous Provision
Scheme read along with Para 18 of the Employees’ Pension
Scheme. This Form also requires indicating the nominee and
family details. Besides that it is also advisable to get a declaration
in the format as given hereinafter containing declaration by the
newly appointed employee since a coverable employee is to be
enrolled as member of the Provident Fund Scheme from the
very first day of his joining and this provision has also been
upheld by the Bombay High Court.1
If the wage/salary of an employee working in a covered
establishment and covered under the Act, exceeds Rs.6500 per
month, then he will be entitled to remain covered upto Rs. 6500
per month. For instance, an employee who is a member and
whose salary was Rs.6400 per month, will continue to be a
member to the extent of Rs.6500 per month even when his salary
is increased to Rs.7000 per month. It the employer and employee
both agree, there is no bar in enrolling such or any other employee
as member under the Employees’ Provident Fund Scheme, 1952.
There are two types of retired employees so far as Employees’
Provident Funds and Miscellaneous Provisions Act, 1952 is
concerned :
1. Those who retire from the establishments including public
sector undertakings which are covered under the
Employees’ Provident Funds and Miscellaneous Provisions
Act, 1952 and they were also members of the Fund and;
2. Those who retire after working in an establishment which
was not covered under the aforesaid Act and the Scheme
including in the Government service where Employees’
Provident Funds Act did not apply.
In the former case, the retired employee from a covered
establishment and having settled his Provident Funds account
from the Provident Fund Department or the Provident Fund Trust
(even on attaining of 55 years age) will not be legally eligible or
liable for Provident Fund membership on his employment or
re-employment in a covered establishment albeit when his wage/
salary is less then Rs.6500 per month. If either of the two
conditions are not fulfilled, the employee will be eligible and
liable to be covered from the first day of joining at least on
Rs.6500 per month even when he is drawing more salary.
The term “excluded employees” is a product of the Employees’
Provident Fund Scheme, 1952 as defined in clause (f) of para 2 as
under :
“An employee whose pay at the time he is otherwise entitled
to become a member of the Fund, exceeds six thousand and
five hundred rupees per month.
Explanation : ‘Pay’ includes basic wages with dearness
allowance, retaining allowance (if any) and cash value of food
concessions admissible thereon.”
“An excluded employee employed in or in connection with
the work of a factory or other establishment to which this Scheme
applies shall, on ceasing to be such an employee, be entitled
and required to become a member of the fund from the date he
ceased to be such employee.” [para 26(3) of EPF Scheme]
Persons who are retiring and settling their claim with the
Provident Funds authorities after attaining the age of 55 years
will be ‘excluded employees’. In this context, the word ‘Fund’ is
important. It signifies that only those persons who have settled
their claim with the Provident Fund established by the Employees’
Provident Fund Act/Scheme or any other Fund covered under
1. Kay Iron Works v. Union of India, 2007 LLR 175 (Bom. HC)
Coverage of Employees under Provident Fund Act
Articles Articles
that Act/Scheme will qualify for being termed as ‘excluded
employee’. To be more specific it is pertinent to note that anybody
retiring from an establishment of the Government or an
establishment not covered by the Employees’ Provident Funds
and Miscellaneous Provisions Act, 1952 will not qualify for
exclusion from membership in a covered establishment under
any circumstances whatsoever.
In this regard reference could be made to a judgment of the
Bombay High Court, where the Asstt. Provident Fund
Commissioner for Maharashtra and Goa called upon the
petitioner to remit the provident fund dues in respect of 11
employees who had already retired. Such employees were, in
fact, retired from service on attaining the age of 55 years. The
amounts due towards their provident fund were also received
by them. However, after retirement, these persons were allowed
to work as per their convenience subject to their health conditions.
The petitioner Company challenged the demand raised by the
provident fund authorities in a writ petition and referred to para
2(f) of the Employees’ Provident Funds Scheme defining ‘excluded
employee’ read with clause (a) of paragraph 69 of the Employees’
Provident Funds Scheme (supra). The High Court quashed the
demand as raised by the Provident Fund authorities.2
In view of provisions contained in para 6A of the Employees’
Pension Scheme, 1995 restricting membership of the Pension
Scheme till attaining the age of 58 years or the fact that any
pensioner availing pensionery benefit under the Employees’
Pension Scheme, 1995, will not be required to be enrolled to the
membership of the pension fund (EPS, 1995) (though they will be
enrolled to the membership of the Employees’ Provident Fund
Scheme, 1952 as there is no age bar for the same) there will be no
requirement to divert their share of pension contribution to the
pension fund. Resultantly their entire EPF contribution will
remain credited in their provident fund account only.
Newspaper establishment
The wage/salary ceiling of Rs.6500 per month for eligibility does
not apply to the employees of the newspaper establishments as
per para 80 of the Employees’ Provident Fund Scheme. The wage/
salary ceiling for employees of newspaper establishments has
been upheld by the Supreme Court.3
Cine workers
For Cine workers the maximum wage/salary ceiling for
eligibility is Rs.15000 per month instead of Rs.6500 per month
vide para 81 of the Scheme.
International workers
An Indian employee having worked or going to work in a foreign
country with which India has entered into a Social Security
Agreement and being eligible to avail the benefits under a social
security programme of that country, by virtue of the eligibility
gained or going to gain, under the said agreement.
- An employee other than an Indian employee, holding other
than an Indian passport, working for an establishment in
India to which the provident fund legislation applies.
- “Excluded Employee” is an International Worker who is
contributing to social security programme of his or her
country of origin, either as a citizen or resident with whom
India has entered into social security agreement on
reciprocity basis and enjoying the status of detached worker
for the period and terms, as specified in such an agreement.
In view of the above and for proper compliance, it will be desirable
for the employer to take a declaration Form (in addition to the
Form 2 as prescribed in the Scheme) from an employee who is
newly appointed as given under the caption Model Forms and
By virtue of the provision contained in proviso under para 26A(2)
read with para 29(2) of the EPF Scheme, 1952, the employer will
have option to restrict his contribution to Rs. 6,500/- pm in the
event the employee covered chooses to contribute on salary
exceeding the prescribed pay ceiling. The employee covered
will have to indicate his intention in writing which needs to be
forwarded to the EPF authorities by the employer. As per Para
26A of the Employees’ Provident Fund Scheme, 1952, a member
of the fund shall continue to be a member until he withdraws the
amount in full and final settlement from the Fund. As such, the
accumulated accretion in the Fund shall qualify for interest
payment in terms of Para 60 of the Employees’ Provident Fund
Scheme, 1952. No time limit has been provided for in this regard.
Para 26(6) of the Employees’ Provident Fund Scheme, 1952 permits
enrollment of an excluded employee on optional basis to the
membership of the Fund. However, there is no provision in the
Employees’ Provident Fund Scheme & Miscellaneous Provisions
Act, 1952 or the Scheme framed thereunder for opting out from
the membership of the fund. As such discontinuance of the
membership will not be permissible.
For International workers the employer has to send to the
Commissioner, within 15 days of close of each month, a return in
Form 5 of the International workers qualifying to become
members of the fund for the first time during the preceding month
together with declaration in Form 2 to furnish by such qualifying
International workers (indicating distinctly the nationality of
each and every International worker). If there is no International
worker qualifying to become member of a fund for the first time
or there is no International worker leaving the service of the
employer, the employer shall send a ‘Nil’ Return. 􀂉
2. Bombay Printers Ltd. v. The Union of India, 1991 LLR 443 (Bom. HC)
3. Express Publications (Madurai) Ltd. v. Union of India, AIR 2004 SC 950 :
2004 LLR 479 (SC).
Coverage of Employees under Provident Fund Act


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