Budget 2026–27 Aligns Provident Fund Tax Rules with EPF Law

The move addresses long-standing inconsistencies between tax law and provident fund legislation relating to eligibility for exemption, investment patterns and employer contribution limits.

In a major reform aimed at reducing ambiguity and litigation, the Union Budget 2026–27 has aligned the income-tax framework governing Recognised Provident Funds (RPFs) with the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, and the Employees’ Provident Funds Scheme, 1952.

The move addresses long-standing inconsistencies between tax law and provident fund legislation relating to eligibility for exemption, investment patterns and employer contribution limits.

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Why the Change Was Needed

Recognised Provident Funds are governed by Schedule XI of the Income Tax Act, 2025. However, until now, there were notable divergences between:

• eligibility for exemption under income-tax law and Section 17 of the EPF Act, 1952,

• investment patterns prescribed under tax rules and those notified by EPFO, and

• limits on employer contributions under the two enactments.

These inconsistencies often led to confusion for employers and employees and resulted in avoidable disputes and litigation.

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Exemption Linked Directly to EPF Act

Under the new framework announced in the Budget:

• Recognition under the Income Tax Act, 2025 will now be available only to those provident funds that have obtained exemption under Section 17 of the EPF Act, 1952.

This establishes a single, clear test for eligibility and reinforces the primacy of the EPF law in governing exemptions.

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Investment Norms Fully Aligned with EPF Framework

The Budget has also harmonised investment provisions by:

• continuing regulation of provident fund investments under the EPF framework and its subordinate legislation, and

• removing the rigid statutory ceiling of 50% on investment in Government securities under income-tax provisions.

This provides greater flexibility while ensuring alignment with EPFO-approved investment norms.

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Employer Contribution Capped at ₹7.5 Lakh

On employer contributions, the Budget has introduced clarity by:

• prescribing a monetary ceiling of ₹7.5 lakh for employer contributions, and

• taxing contributions beyond this limit as perquisites in the hands of the employee.

This aligns income-tax treatment with existing monetary thresholds and brings certainty to tax liability.

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A Step Towards Convergence and Certainty

The rationalisation introduced in Union Budget 2026–27 is expected to significantly benefit employers, employees and fund administrators by:

• clearly establishing that EPF exemption is governed by the EPF Act, 1952,

• aligning investment norms with EPFO regulations, and

• standardising the tax treatment of employer contributions.

The reforms mark a decisive step towards convergence and harmonisation between tax law and provident fund legislation, reducing compliance burden and litigation risk.

Further details are available in the Finance Bill, 2026–27 and the FAQs on Budget issued by the Central Board of Direct Taxes (CBDT).