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PF deduction on Notice & Severance Pay

Posted @ March 7, 2015, 2:33 am under (Labour Law)

Whether PF deduction applicable on Notice & Severance Pay, there are contradicting views on this issue:

According to one view, which is very simple and straight forward, any amount paid/payable to an employee for his service/work is wages and therefore PF deduction should be made. However following alternate view also prevail in Industry:

According to the definition of salary/wages under Section 2 (b) of EPF Act:

"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:

(i) the cash value of any food concession; (ii) 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, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment; (iii) any presents made by the employer; (c) “Contribution” means a contribution payable in respect of a member under a scheme or the contribution payable in respect of an employee to whom the Insurance Scheme applies; (d) “controlled industry” means any industry the control of which by the Union has been declared by a Central Act to be expedient in the public interest;


Considering the definition of Wage in RPF Act Notice pay is not a wage as it is not earned by the employee while on duty. Therefore  EPF is not payable on this and no deduction is applicable as employee has not actually worked during notice period and money paid is in lieu of notice period does not amount to salary or wages earned while on job.


Whenever employment relationship abruptly comes to an end by the act of either party, the party breaching the contract should compensate the other party in lieu of notice. Since it is a compensation and not usual salary, no PF deduction is required to be made.


But, prior notice is given and the employee is continuing in service during and till the notice period comes to an end, the employer is on the rolls of his/her employer and every month he/she is entitled to receive his/her wages along with company employees on due date after the wage period. In this case, PF deductions should to be made from such salary or wages.

Bombay High Court in case of India United Mills Ltd. vs Regional Provident Fund ... on 4 September, 1958 citations: (1959) 61 BOMLR 1385, (1959) IILLJ 733 Bom held

The provident fund contribution under the Act and the scheme has to be made on the basis of a percentage of the basic wages and dearness allowance actually drawn. The amounts paid under the standing orders for securing the due termination of the employment of the employees without notice cannot be treated as amounts drawn by the employees as "basic wages" or dearness allowance and the provisions of the Act and the scheme are not applicable thereto. No amount is payable in connection therewith by way of provident fund contribution and the demands made upon the petitioner company are not warranted by law and are not justified.





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