Employees Provident Fund: The Three Schemes

That Explanation is the only place in the Code where the familiar abbreviation is given a legal meaning. The Employees' Provident Fund Organisation is not a separate body corporate; the body corporate is the Central Board under section 4(2), and the Organisation is its staff.

Section 14(2). The Commissioner is subject to the general control and superintendence of the Central Board in discharging his functions.

Section 14(3) and (4). The Central Government shall also appoint a Financial Advisor and Chief Accounts Officer to assist him. The Central Board may appoint Additional, Deputy, Regional and Assistant Provident Fund Commissioners and such other officers as it considers necessary.

Section 14(5), the Union Public Service Commission. No appointment to the post of Central Provident Fund Commissioner, Additional Central Provident Fund Commissioner, Financial Adviser and Chief Accounts Officer, or any other post under the Board carrying a scale equivalent to a Central Government Group A or Group B post, shall be made except after consultation with the Union Public Service Commission. The proviso excuses that consultation for an appointment not exceeding one year, or where the person appointed is already a member of the Indian Administrative Service or already in Central Government or Central Board service in a Group A or Group B post.

Section 14(6) and (7), pay. The Commissioner's and the Financial Adviser's salary and allowances are paid out of the Provident Fund itself. Other officers' conditions are specified by the Central Board in accordance with the rules applicable to Central Government officers on corresponding scales, with prior Central Government approval needed for any departure, and with their pay capped by the scales in the Provident Fund Scheme.

Section 15: the three schemes

The Central Government may, by notification, frame the following:

Section 15(2), the Fifth Schedule. The three main schemes may provide for the matters specified in Part A, Part B and Part C of the Fifth Schedule respectively: Part A for the Provident Fund Scheme, Part B for the Pension Scheme, Part C for the Insurance Scheme.

Section 15(3), retrospectivity. A scheme may provide that all or any of its provisions take effect prospectively or retrospectively from a date specified in it.

Clause (d) is easy to miss and worth noticing. It lets the Central Government frame a scheme for self-employed workers or any other class of persons, who are by definition not employees of anybody. Chapter III is therefore not sealed off from the unorganised sector.

Section 16: the three funds and the rates

This is the section that carries the numbers, and the numbers get asked.

The Provident Fund, section 16(1)(a).

• The employer's contribution is ten per cent of the wages for the time being payable to each employee, whether employed directly or by or through a contractor.
• The employee's contribution is equal to the employer's contribution in respect of him.
• An employee may contribute more than ten per cent if he wishes, but the employer is not obliged to match anything above his own statutory contribution.
• First proviso: for any establishment or class of establishments the Central Government may specify by notification, after such inquiry as it thinks fit, "ten per cent" is replaced by "twelve per cent" at both places where it occurs.
• Second proviso: the Central Government may, after such inquiry as it thinks fit, notify rates of employees' contributions and the period for which those rates apply, for any class of employee.

Read the first proviso carefully. The Code's own headline rate is ten per cent; twelve applies where notified. Students routinely state twelve as the rate in the Code, which is stating the proviso as the section.

The Pension Fund, section 16(1)(b). Established in the manner specified in the Pension Scheme, and paid into, for every employee who is a member of the Pension Scheme:

1. such sums out of the employer's contribution under clause (a), not exceeding eight and one-third per cent of the wages, or such percentage as the Central Government notifies;
2. such sums as the Pension Scheme specifies, payable by employers of establishments exempted under section 143 to which the Pension Scheme applies;
3. such sums as the Central Government specifies, after due appropriation by Parliament.

The eight and one third per cent is diverted out of the employer's contribution, not added to it. That is the single most misunderstood figure in this Chapter. The employer pays ten (or twelve), and part of what he pays, up to eight and one third of wages, is routed to the Pension Fund instead of the Provident Fund.

The Insurance Fund, section 16(1)(c). The employer pays, for every employee in relation to whom he is the employer, an amount not more than one per cent of the wages, or such percentage as the Central Government notifies. The proviso requires the employer to pay in further sums not exceeding one fourth of that contribution, as the Central Government determines from time to time, to meet the expenses of administering the Insurance Scheme, other than the cost of the benefits themselves.

Section 16(2), vesting. The Provident Fund, the Pension Fund and the Insurance Fund vest in, and are administered by, the Central Board in the manner specified in the respective schemes.

A summary of the money:

A worked example

Sunil earns wages of 20,000 rupees a month at an establishment with sixty employees. No notification has raised the rate to twelve per cent for his establishment.

Step 1. Does Chapter III apply? Yes. The First Schedule brings in every establishment with twenty or more employees, and this one has sixty.

Step 2. Is Sunil an "employee" for this Chapter? Only if his wages are at or below the wage ceiling notified under section 2(89), because the first proviso to section 2(26) restricts "employee" for Chapter III, except the Provident Fund Scheme, and for Chapter IV, to employees drawing wages up to that ceiling. Assume he is.

Step 3. What does the employer pay? Ten per cent of 20,000, so 2,000 rupees: section 16(1)(a).

Step 4. What does Sunil pay? An equal amount, 2,000 rupees. If he wants to save more he may put in, say, 3,000, but his employer is not obliged to go above 2,000.

Step 5. How much of the employer's 2,000 goes to the pension? Up to eight and one third per cent of wages, that is up to 1,666.67 rupees of the 2,000, is paid into the Pension Fund under section 16(1)(b)(i). The balance stays in the Provident Fund. The employer's outgoing is unchanged; only its destination is split.

Step 6. And the insurance? The employer pays not more than one per cent of wages, so up to 200 rupees, into the Deposit-Linked Insurance Fund under section 16(1)(c), plus up to a further quarter of that, that is up to 50 rupees, towards administering the scheme.

Step 7. Who holds the money? All three funds vest in the Central Board under section 16(2), and are administered by it in the manner the respective schemes specify.

What this does NOT mean

The employer does not pay ten per cent plus eight and one third per cent plus one per cent of wages towards pension and provident fund separately. The pension money comes out of the ten per cent. Only the insurance contribution under clause (c) is additional.

Twelve per cent is not the rate in the Code. Ten is. Twelve is what the first proviso substitutes for establishments the Central Government notifies.

The employee cannot force the employer to match a higher contribution. Section 16(1)(a) says in terms that the employer is under no obligation to pay anything above his own statutory contribution.

The Employees' Provident Fund Organisation is not the Central Board. The Board is the body corporate under section 4(2). The Organisation, defined in the Explanation to section 14(1), is the body of its officers and employees.

A scheme is not a rule. Schemes are framed under section 15 and carry the working detail of the benefit; rules are made under sections 154 to 156. The Fifth Schedule tells you what a scheme may contain.

Limits and criticism

Almost every number can be changed by notification. The ten per cent, the employees' rates, the eight and one third per cent and the one per cent are each subject to a power to notify something else. The Code fixes the architecture and leaves the arithmetic to the executive.

Retrospective scheme making is a strong power. Section 15(1)(e) and section 15(3) allow a scheme, and a modification of a scheme, to operate retrospectively. That is unusual in delegated legislation and it is a fair point of criticism in an essay.

The wage ceiling is not in the Code. Section 2(89) leaves it to be notified, so the Chapter's coverage in practice is executive rather than legislative.

Consultation with the Union Public Service Commission has wide exceptions. The proviso to section 14(5) dispenses with it for appointments up to a year and for anyone already in the Indian Administrative Service or in Group A or Group B service.

Quick revision

• Section 14: Central Provident Fund Commissioner is Chief Executive Officer of the Central Board and head of the Employees' Provident Fund Organisation, which the Explanation defines as the Board's officers and employees; he is under the Board's general control and superintendence; UPSC consultation for senior posts, with three exceptions; his salary comes out of the Provident Fund.
• Section 15: three schemes, plus a residual power. (a) Provident Fund Scheme; (b) Pension Scheme, covering superannuation, retiring and permanent total disablement pension, widow or widower's, children's, orphan and nominee pension; (c) Deposit Linked Insurance Scheme; (d) any other scheme for self-employed workers or any other class; (e) modification, prospective or retrospective. Contents are in Parts A, B and C of the Fifth Schedule.
• Section 16: employer ten per cent of wages, twelve where notified; employee an equal amount, more if he wishes without matching; up to eight and one third per cent diverted out of the employer's contribution to the Pension Fund; not more than one per cent to the Insurance Fund, plus up to a further one fourth of that for administration. All three funds vest in the Central Board.

Test yourself

1. State the employer's and the employee's rates of contribution under section 16(1)(a). The employer pays ten per cent of the wages payable to each employee, whether employed directly or through a contractor, and the employee pays an equal amount. Where the Central Government so notifies for an establishment or class of establishments, the first proviso substitutes twelve per cent at both places.

2. An employee wants to contribute fifteen per cent. May he, and must the employer match it? He may. Section 16(1)(a) expressly allows an employee who so desires to contribute more than ten per cent. The employer is under no obligation to pay any contribution over and above his own statutory contribution.

3. Where does the money in the Pension Fund come from? Principally from the employer's own contribution under clause (a), to the extent of sums not exceeding eight and one third per cent of wages or such percentage as is notified: section 16(1)(b)(i). It also receives sums from employers of establishments exempted under section 143 to which the Pension Scheme applies, and sums specified by the Central Government after appropriation by Parliament.

4. Name the three schemes under section 15 and one kind of pension the Pension Scheme provides. The Employees' Provident Fund Scheme, the Employees' Pension Scheme and the Employees' Deposit Linked Insurance Scheme. The Pension Scheme provides superannuation pension, retiring pension, permanent total disablement pension, widow or widower's pension, children pension, orphan pension and nominee pension.

5. In whom do the three funds vest? In the Central Board, which also administers them in the manner specified in the respective schemes: section 16(2).

6. Can a scheme framed under section 15 operate from a past date? Yes. Section 15(1)(e) permits modification prospectively or retrospectively, and section 15(3) permits a scheme to provide that all or any of its provisions take effect prospectively or retrospectively from a date specified in it.