AccountAble

Statutory Staff Benefits In this issue Statutory Benefits ................................ 1

Minimum Wages.............................................. 1 Provident Fund ................................................ 1 Pension ............................................................. 3 Gratuity ............................................................. 3

Issue 110 for Feb-05; Released: Nov- 05

Budgeting............................................ 3 Fringe Benefit Tax ............................... 4

Apart from this, in some states3, the Act is applicable to workers engaged in schools, hospitals, pharmacies, etc. In Bihar and Jharkhand, the Act is also applicable to all religious and social institutions as also Khadi and village ni 4 dustries . If an employee is covered by the Minimum Wages Act, then the minimum notified wages must be paid to him or her5. These vary from one region to another, and from one job to another. There is no exemption or proportional reduction in wages for e mployees who work for a limited number of hours, such as teachers at an NFE centre6. If a lower payment is made, then the employer can be fined or imprisoned. Provident Fund Provident Fund is an emergency fund, set aside for use by employees. The fund is compulsory in some cases. Others can also start their own fund, if they so desire.

If charity begins at home, then NGOs need to think about their staff also. However, only a few NGOs are able to put this into practice. This is partly due to lack of funds, as also lack of information about what can be done. In this issue, we describe various staff benefits, and ways to tackle accounting, budgeting and taxation aspects of such benefits.

Statutory Benefits
Some benefits are guaranteed to employees under labour laws. These are called statutory benefits. In some cases, these are applicable to NGOs also. Minimum Wages The Minimum Wages Act, 1948 is not applicable to NGOs by themselves. However, if their workers are engaged in certain activities, then the Act becomes applicable to those workers1. These activities include agriculture, farming, dairy, horticulture, forestry and other farm operations 2.

State amendments to part I of the schedule

4 1

State amendment to part I of the schedule

There is no threshold limit for number of employees as in the case of PF Act.

2

This does not mean that you can not pay more than minimum wages!
6

Part II of Schedule to Minimum Wages Act, 1948

Section 15 read with section 13 of Minimum Wages Act, 1948

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Compulsory Provident Fund

Provident Fund is compulsory for those NGOs where 20 or more employees are working in a specified activity. This i n cludes certain types of manufacturing as also some non-factory activities 7. Who is an employee? Any person who receives wages for work is an employee. Renaming wages as honorarium does not change things. The relationship of employee and e mployer is 8 important for this purpose . Part-time

employees are also covered 9 under PF. However, casual labour and people employed for short durations are not counted10. Total Provident Fund contribution comes to 21.16% of the salary amount. Of this, 10% is contributed by the e mployee from his / her salary, another 10% by the employer 11, and the balance 1.16% is contributed by the Government. The total collection of 20% should be deposited with the PF Commis sioner every month. The Fund is administered by the PF Commissioner. Currently12, its investments are valued at about Rs.10.27 kharabs13.
Voluntary Provident Fund

Examples include: Printing, including screen printing Medical and pharmaceuticals, including ayurvedic medicines Agarbatti, Textiles, coir or leather items Bottling or canning of fruits and vegetables Stationery items Milk and milk products Processing or manufacture of wooden furniture, sports goods, cane or bamboo products Wood workshops Societies, clubs or associations which provide boarding, lodging or other services to members Societies, clubs or associations which stage plays or other performances, on the basis of a ticket. Societies, clubs or associations which provide services to their members on subscription or membership fees Hospitals run by any individual, society or institution Schools, training centres, scientific or research associations NGOs running credit-based lending programs for earning interest

If Provident Fund Act does not apply to you, you can still provide this benefit to the workers. This can be done by d epositing the desired amount in a Public Provident Fund account in the name of each worker. This account is normally opened in a Post Office or State Bank of India.

T.I. Cycles of India v. E.S.I.C., Madras, 1977 Lab IC 1335; Railway Employees Cooperative Banking Society Ltd. V Union of India, 1980 Lab IC 1212 Raj.
10

P.F. Inspector, Guntur v. T.S. Hariharan, AIR 1971 SC 1519; R.P.F. Commissioner, A.P. v. T.S. Hariharan, (1971) 2 SCC 68
11

For some industries, a higher rate of 12% is applicable.

12 13

31-March-2003

Sri Varadarajaswami Transports (P) Ltd. V. R.P.F. Commissioner AIR 1966 Mad 466

1 kharab = 100 arabs or 100 billion or 10,000 crores

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In such a case, there is no requirement of a fixed percentage or amount 14 that you must contribute. You can therefore decide and fix this amount internally. However, it is best to make the contribution regularly, at least on an annual basis. Pension If Provident Fund Act is applicable to your organisation, then there is no need to provide separately for pension. This is because more than half the amount of monthly contributions to PF is taken to a Pension Fund 15 by the Government. However, other NGOs must seriously consider the question of pension for old and retired employees. An amount of about 10% of salary nvested each year i would be sufficient to provide lifelong pension to a worker after retirement. This can be done by taking out a superannuation policy with an insurance company on behalf of the employees. Gratuity Gratuity originally started as a voluntary payment to workers at the time of retirement. However, once the Payment of Gratuity Act, 1972 was passed, it b ecame compulsory for commercial em-

ployers to pay gratuity. In 1997, the Act was extended to NGOs as well16. If an NGO employs 10 or more workers, then payment of gratuity is compulsory. The payment is made on termination of employment, if the employee has completed five years of service. However, if the employee dies before completing five years, gratuity is payable. Gratuity is calculated on the basis of a formula: 15 days X 26 days Years of service X Last salary drawn

For this purpose, salary includes dearness allowance, but does not include HRA or other benefits. NGOs required to pay gratuity must take out an insurance policy with LIC or another insurer 17. Premiums for this policy are paid annually. When gratuity is paid to an employee, the insurer pays back the amount in that employees account. Maximum amount payable to a worker under the Act is limited to Rs.3,50,000.

Budgeting
The main problem that NGOs face with regard to staff benefits is that of funds. Where will the funds come for this? Another problem is that of uneven budgeting policies. Some donor agencies are willing to provide funds for staff benefits. Others are not willing. Introducing benefits for some workers, while
16

14

You need to deposit at least Rs.500/each year in order to keep the account going.
15

Out of the total monthly accretion of 21.16%, 10% is retained in Provident Fund Account. Balance 11.16% is taken to the Pension Fund Account.

With effect from 6-Sep-1997 (S.O. 2218 dated 20-Aug-1997, issued under Payment of Gratuity Act, 1972).
17

Section 4-A, Payment of Gratuity Act, 1972

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denying these to others can create problems. Actually both these problems call for a simple change of perspective. Firstly, NGOs need to view these payments as essential and negotiate budgets on this basis. Secondly, the line item for salaries must be renamed as salaries and benefits. This will allow an NGO to pay for the benefits as well from the same head. This is demonstrated by the pie charts below.

What happens if the donor agencies feel that the extra burden is beyond their capacity? One way to deal with this is to redirect the increments for the first one or two years into these benefits. After that, normal budgeting can be resumed.

Fringe Benefit Tax

Will the NGOs have to pay fringe benefit tax on any staff benefits? No. All NGOs registered under Income Tax Act in I n dia have been exempted from fringe benefits tax.
What is AccountAble: Each issue of 'AccountAble' covers a different topic r lated to NGO e regulation or accounting and is mailed to about 2,700 persons in NGOs, Agencies and audit firms. AccountAid encourages reproduction or redistribution of AccountAble in workshops or NGO newsletters for non-commercial use, provided the source is acknowledged. AccountAble in Hindi: Aka%{qebl ihNdI me< leoayaeg' ke nam se %plBx hE, Interpretation of law: Interpretation of law given here is of a general nature. Please consult your advisors before taking any important decision. AccountAble on the Web: All the past issues of AccountAble are available on our web-site www.accountaid.net. AccountAid Capsules: Short items of inform ation on NGO accounting and related issues. To subscribe, send e-mail to accountaidsubscribe@topica.com . Questions?: Your questions, comments and suggestions can be sent to AccountAid India, 55B, Pocket C, Siddharth Extension, New Delhi110 014; Phone: 011-2634 3128; Ph./Fax: 0112634 6041; e-mail: accountaid@vsnl.com ; accountaid@gmail.com . AccountAid India ivm s<vt! 2062 kaitRk , November 2005 CE Published by AccountAid I dia, New Delhi. Ph. n 2634 3128, 2634 6111; Printed at Chanakya Mudrak Pvt. Ltd., New Delhi. Ph.: 4142 0316, 2592 7951 For private circulation only.

PF/ FPF 0%

Gratuity 0%

Salary 100%

Present Treatment
Gratuity 4%

PF/ FPF 16%

Salary 80%

Proposed Treatment However, it must be kept in mind that the net monthly payment to the staff should not dip below the existing payment, as this may cause hardship. Therefore, an NGO needs to negotiate a higher budgetary allocation to meet this liability.

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