Since 2019 the courts have asked whether an allowance is really paid to everyone. Since 2025 the Code on Wages asks how much of total pay sits outside wages. Both push the same way: substance over labels, backed by records. This case study joins the two.
The case: Vivekananda Vidyamandir (2019)
An unaided school in West Bengal paid a "special allowance" to teaching and non-teaching staff, adjusted as tuition fees rose. The PF authority treated it as part of basic wages. The employer won in parts of the Calcutta High Court, then the Commissioner appealed. The Supreme Court heard it with four similar appeals from Surya Roshni, Montage Enterprises, U-Flex and Saint-Gobain Glass India, where allowances such as special, management, conveyance, lunch and house rent had been left out of PF.
The bench of Justices Arun Mishra, Navin Sinha and M.R. Shah decided on 28 February 2019 that the test is universality. Wages "universally, necessarily and ordinarily paid to all across the board" are basic wages. The employers had shown nothing to prove their allowances were variable or incentive-linked, so the Court held they were "essentially a part of the basic wage camouflaged as part of an allowance" (judgment; citation AIR 2019 SC 1240 per Wikipedia).
How the story moved on
| Date | Event |
|---|---|
| 21 November 2025 | Four Labour Codes come into force, including the Code on Wages with a new wage definition (Ministry release via CLE) |
| 28 August 2019 | Supreme Court dismisses the Surya Roshni review petition; EPFO circular 717 restricts wage-splitting inquiries to cases with a credible prima facie basis and CAIU permission (Khaitan & Co) |
| 28 February 2019 | Supreme Court decides Vivekananda Vidyamandir and connected appeals |
Two tests, one lesson
| Judgment test (2019) | Code on Wages (2025) | |
|---|---|---|
| Question | Is the allowance paid universally, necessarily and ordinarily to all? | Do excluded components exceed 50% of total remuneration? |
| Result if yes | It is basic wages for PF | The excess is added back to wages |
| Who proves it | Employer, with records | Employer, through payroll classification |
| Genuine variable pay | Outside basic wages if truly conditional | Ministry FAQs say incentives and ESOPs are not wages |
Sources for the right-hand column: S.S. Rana and People Matters. The two tests are separate legal rules, so passing one does not guarantee passing the other.
What employers should take from this
- Classify by substance. Regular, across-the-board pay is wages for PF, whatever it is called.
- Do not mistake the 50% rule for a basic-pay target. It caps exclusions; it does not set basic at 50%.
- Keep proof. Eligibility rules, performance criteria and a written salary-structure rationale are your defence.
- Audit the past. Reconcile PF paid against actual wages to find gaps early.
- Re-check as rules settle. Central and state rules under the Codes were still being notified in 2026.
TeamIndia Compliance runs payroll and PF structure reviews for employers across Delhi NCR and India. Book a free consultation.
General information, not legal advice.