Budget 2026 simplifies tax rules for PF trusts: What changes for you
New Delhi, Feb 4, 2026
EPFO said the rationalisation will serve the interests of all stakeholders by ensuring convergence between the Income Tax Act and EPF laws.
The Union Budget 2026–27 has proposed a major clean-up of the income tax framework governing provident fund (PF) trusts, a move that has been welcomed by Employees’ Provident Fund Organisation (EPFO).The changes aim to align income tax rules with existing EPF laws, ending long-standing inconsistencies that often confused employers, employees and PF trust administrators.
What was the problem earlier?
Private or recognised provident fund trusts are governed by Schedule XI of the Income Tax Act, 2025. However, the rules under tax law were not fully aligned with the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the EPF Scheme, 1952.
This led to several issues:
Different eligibility criteria for PF exemption under tax law and EPF law
Mismatch in investment norms between Income Tax rules and EPFO guidelines
No clear alignment on limits for employer contributions
According to the labour ministry, these differences often resulted in confusion, compliance challenges and avoidable litigation.
What the Budget has changed
The Budget proposes to harmonise the two frameworks, ensuring that provident fund taxation follows the same logic as EPF regulations.
1. Clear rules on exemption
Going forward, recognition under the Income Tax Act, 2025 will be available only to those PF trusts that have received exemption under Section 17 of the EPF Act, 1952.
Under Section 17, employers can seek exemption from filing monthly EPF returns if they manage employee PF accounts and contributions in line with EPF standards. This change removes ambiguity on which PF trusts qualify for tax exemption.
2. Investment norms aligned with EPF rules
The Budget removes the earlier rigid statutory cap that limited investment in government securities to 50% under tax rules.
Instead, investment norms for PF trusts will now be governed entirely by the EPF framework and its subordinate regulations, bringing consistency between tax and labour laws.
3. Employer contribution ceiling clarified
Employer contributions to provident funds will now be governed by a clear monetary ceiling of ₹7.5 lakh per year.
• Contributions up to ₹7.5 lakh remain tax-efficient
• Any amount above ₹7.5 lakh will be taxed as a perquisite in the hands of the employee
This aligns tax treatment with existing thresholds under income tax law and removes uncertainty for high-salaried employees.
"Previously, divergent rules in the Income Tax Act and the EPF Act – particularly around eligibility for exemptions, investment norms and employer contribution limits, had created confusion, compliance burdens and avoidable litigation for private PF trusts and corporate retirement funds. The Budget has now harmonised these regimes so that only those PF trusts that are exempt under Section 17 of the EPF Act will qualify for Income Tax recognition, ensuring that tax exemptions adhere to the same statutory thresholds and administrative criteria under the EPF law," said Vipin Upadhyay, Partner, King Stubb & Kasiva, Advocates and Attorneys.
Investment norms for PF funds are now fully governed by the EPF framework, with the earlier restrictive 50 % limit on government securities removed, thereby offering greater flexibility in fund management.
On the employer side, contributions up to ₹7.5 lakh per annum will remain tax-free, while any excess will be treated as a taxable perquisite, replacing the older percentage-based contribution ceilings and parity conditions.
"This realignment simplifies the regulatory landscape, reduces ambiguity and litigation, improves compliance predictability and brings greater consistency between tax and labour laws affecting retirement savings vehicles, a development welcomed by the Employees’ Provident Fund Organisation (EPFO) as a key step toward coherent fiscal administration of PF schemes," said Upadhyay.
Why EPFO has welcomed the move
EPFO said the rationalisation will serve the interests of all stakeholders by ensuring convergence between the Income Tax Act and EPF laws.
By clearly stating that EPF exemption flows from the EPF Act, aligning investment rules, and standardising employer contribution limits, the changes are expected to:
• Reduce disputes and litigation
• Simplify compliance for employers
• Provide greater clarity and predictability for employees
What PF rationalisation means for employees
Key points include:
• No change in the Rs 750,000 annual tax-free cap on employer contributions across PF, NPS and superannuation
• Removal of the rule that forced parity between employer and employee PF contribution rates
• Removal of the provision that taxed employer PF contribution above 12 per cent of salary
This means employers can contribute more than 12 per cent of salary to PF without automatically triggering a tax perquisite, provided the overall cap is not breached.
[The Business Standard]
