PF on subsistence allowance during suspension: what changed from July 2026

Suspensions are rare, and that is part of the problem. When a plant suspends a worker pending inquiry, the payroll team often has to work out from scratch what to pay and what to deduct. The PF question in particular has changed quietly. For years the answer to PF on subsistence allowance was a simple no. Since the Employees' Provident Funds Scheme, 2026 came into force in July 2026, that answer is no longer safe.

This post sets out the old rule, why it has lost its footing, how ESI fits in, and a worked example.

Subsistence allowance during suspension: the basic rule

Section 38 of the Industrial Relations Code, 2020 sets the minimum subsistence allowance during suspension pending an inquiry into misconduct:

• 50% of the wages the worker was drawing just before suspension, for the first 90 days;
• 75% for the rest of the period, if the delay in finishing the inquiry is not directly caused by the worker's conduct.

The rule is the same as the old Industrial Employment (Standing Orders) Act. Two points come up often:

1. If the worker causes the delay, the step-up to 75% does not happen, but the 50% continues. Nothing in section 38 lets the employer go below 50%.
2. Some States have their own laws on subsistence allowance with higher rates or shorter periods before a step-up. Check your State's rules before you settle on the Code's minimum.

The base is "wages" as the Codes define it: basic pay, dearness allowance and retaining allowance, with the 50% add-back. Many companies simply pay half the gross per-day salary, which is more generous and safe.

ESI on subsistence allowance: settled

ESI on subsistence allowance is not in doubt. In Regional Director, ESIC v. Popular Automobiles (1997), the Supreme Court held that subsistence allowance is wages under the ESI Act, because it is paid for remaining attached to the employer's service. ESIC's wages page still says contribution is payable on it.

The Code on Social Security now has one wage definition for both the ESI and EPF chapters, and ESIC has told employers to use it. Nothing in it takes subsistence allowance out.

Why the old PF answer was no

The EPF Act, 1952 charged PF on "basic wages", defined as emoluments earned by an employee "while on duty or on leave or on holidays with wages". A suspended worker is neither on duty nor on leave. EPFO's FAQ therefore said that PF is not payable on subsistence allowance, and most payroll systems were built that way.

PF on subsistence allowance under the EPF Scheme 2026

The EPF Scheme, 2026 (G.S.R. 525(E), dated 29 June 2026) replaced the 1952 Scheme under the Code on Social Security. It does not use "basic wages" at all:

• Paragraph 18(2): the employer's contribution is 12% of "the wages payable" to the employee.
• Paragraph 18(4): contributions are worked out on "wages actually drawn or payable during the month".
• Paragraph 2(2): words not defined in the Scheme take their meaning from the Code, so "wages" means section 2(88).

Section 2(88) covers "all remuneration ... which would, if the terms of employment ... were fulfilled, be payable to a person employed in respect of his employment". There is no "on duty" limb, and subsistence allowance is not in the list of exclusions. These are close to the words the Supreme Court read in Popular Automobiles to bring the allowance into ESI wages.

The contrary signals are weak. The Labour Ministry's FAQs of December 2025 describe "wages" mostly as basic, DA and retaining allowance, with other payments counting through the 50% rule. But they do not mention suspension, and they say themselves that the Code prevails.

Our reading: for wage months from July 2026, PF is probably payable on subsistence allowance. That is a medium-confidence view, not a settled one. For months before July 2026, EPFO's FAQ and the old "on duty" words still stand, so leave it out there.

Weighing the risk

If you include it and EPFO later says it was not needed, the cost is 12% plus 12% of a small, rare amount, and the employee's share sits in his own PF account. If you leave it out and EPFO disagrees, you face a dues determination with interest and damages for every suspension case, often discovered years later. Including it is the cautious choice, and a company that takes advice the other way can change it.

A worked example

Sunil works as a CNC operator at an auto-parts plant in Nashik. His wages (basic plus DA) are ₹18,000 a month and his gross is ₹20,000, so he is covered by both PF and ESI. He is suspended pending inquiry on 1 August 2026.

If the inquiry runs past 90 days and the delay is not his doing, the allowance rises to ₹13,500 from the 91st day, and PF and ESI follow it.

Two practical notes. The employee's PF share comes out of the allowance, which is a permitted deduction under the Code on Wages. And the payslip should say so plainly, because a worker already receiving half pay will notice every rupee. If the inquiry ends in reinstatement with full back wages, the difference is an arrear, and PF on it goes the way we described in PF on salary arrears.

Section 38 Industrial Relations Code: a short checklist

1. Record the suspension order date and the reason for any delay in the inquiry, because the 75% step-up depends on it.
2. Check whether your State has a more generous subsistence allowance law.
3. Put the allowance in ESI wages, always.
4. For wage months from July 2026, put it in PF wages unless your CA or PF consultant advises otherwise, and keep that advice on file.
5. Show the PF and ESI deductions clearly on the payslip.

For the wider changes in the new Scheme, see the EPF Scheme 2026 post, and for how the Code's wage definition works component by component, the 50% wage rule post.

Vatsin Payroll pays the allowance from the company's suspension rules, always includes it in ESI wages, and by default includes it in PF wages only for wage months from July 2026. A company can change that setting if its own adviser reads the Scheme differently.