The Employees' Provident Fund Organisation's decision to calculate and deduct Provident Fund on the basis of employees' gross income rather than their basic salary will lead to a decline in take-home salary.

The EPFO has announced that it would treat all allowances which are paid in cash, such as medical, road transport and education, as part of the basic salary.

For instance, an employee gets an annual salary of Rs 8 lakh, of which Rs 5 lakh is the basic salary. Thus far, the Provident Fund contribution (12 per cent) was calculated on Rs 5 lakh (basic salary), but now it will be calculated on Rs 8 lakh.

However, allowances like house rent, bonus, overtime benefits, performance-linked incentives, commissions and presents will be excluded while evaluating an employee's PF.

The decision will lead to a decline in take-home salary, but it will also increase savings for the employee. A good part of the decision is that the government or other employers will also increase shares of their PF contributions.

But, the move will not be of any advantage to those employees who earn in the Cost to the Company (CTC) format because the spending of a company on an employee receiving a certain CTC is a fixed amount and all the PF contributions would be deducted on the basis of that fixed amount.