Budget 2026 Proposes Major Changes in EPF Rules, Know Key Changes

The Union Budget 2026 has proposed major changes to the taxation and compliance framework for the employees’ provident fund (EPF) scheme, aiming to simplify employer compliance and rationalise tax deduction at source (TDS) rules. The Finance Bill 2026 seeks to amend Schedule XI of the Income Tax Act, 2025, which governs recognised provident funds, removing outdated restrictions and aligning them with the statutory and administrative provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees’ Provident Fund Scheme, 1952.

Here’s a look at the key employee provident fund (PF) changes proposed in the Budget 2026.

EPF Rules: Key Changes Proposed in Budget 2026

Rationalising PF Provisions The Budget proposes

removing parity-based and percentage-based limits on employer contributions, eliminating salary-linked relaxations, shareholder-specific rules, and revising investment restrictions in Government securities. Employer contributions will now fall under the aggregate ceiling of Rs 7.5 lakh prescribed under section 17(1)(h) of the Income Tax Act, 2025, across PF, NPS, and superannuation, giving more flexibility in compensation structuring.

“It is proposed to amend Schedule XI to rationalise the provisions relating to recognised provident funds by deleting parity-based and percentage-based limits on employer contributions, removing salary-linked relaxations and shareholder-based distinctions, aligning eligibility for recognition with exemption under section 17 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, and modifying investment-related provisions to remove rigid statutory caps inconsistent with prevailing EPFO norms,” Finance Minister Nirmala Sitharaman said in the Budget speech.

No Change for Employees
Employees will continue to enjoy tax-free employer contributions up to Rs 7.5 lakh. Employer contributions exceeding this limit will be taxed as perquisites. The Budget document says, “Employer contributions shall be subject to the monetary ceiling prescribed under section 17(1)(h) of the Income-tax Act, 2025. Once this monetary ceiling is crossed, the contributions will be taxed as perquisites. The existing provisions in Schedule XI of the Income Tax Act, 2025, deeming employer contributions as income, are proposed to be omitted.”

Shareholders of the company
Employees who are also company shareholders will no longer face stricter PF limits or conditions. The existing PF contribution framework available to other employees will also be applicable for such workers without any differential limits.

“The differentiated limits presently provided in Schedule XI are proposed to be removed, and such employees shall be governed by the same contribution framework as other employees, i.e. the limit prescribed in section 17(1)(h) of the Income-tax Act, 2025 and the framework set in place by the EPFO,” the Central Board of Direct Taxes (CBDT) said in its Budget FAQs.

The Finance Ministry expects these changes to reduce disputes, simplify compliance, and provide greater flexibility in structuring employee benefits. These amendments will come into effect from April 1, 2026.
Tags: Finance, Budget 2026, Provident Fund