Budget 2026 Aligns Income-Tax and EPF Rules for Recognised Provident Funds

Recognised Provident Funds are regulated under Schedule XI of the Income Tax Act, 2025. Until now, there were significant inconsistencies between the income-tax provisions and Section 17 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. 

These differences extended to eligibility for tax exemption, prescribed investment patterns, and the limits applicable to employer contributions. The lack of alignment created ambiguity and led to unnecessary litigation.

Budget 2026–27: Framework Harmonisation

The Union Budget 2026–27 has sought to resolve these issues by synchronising the income-tax framework applicable to recognised provident funds with the statutory and administrative provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, as well as the Employees’ Provident Funds Scheme, 1952. This move brings greater clarity and consistency to the regulatory regime.

Exemption Criteria

Under the revised framework, recognition under the Income Tax Act, 2025, will be granted only to provident funds that have obtained exemption under Section 17 of the EPF Act, 1952, clearly establishing the primacy of the EPF law in governing exemptions.

Investment regulations will now be fully aligned with the EPF framework and its subordinate legislation. Notably, the earlier statutory restriction that capped investment in government securities at 50% has been withdrawn, allowing greater flexibility in portfolio allocation.

Employer’s Contribution

In addition, the employer’s contribution will be subject to a uniform monetary ceiling of ₹7.5 lakh. Any contribution beyond this limit will be treated as a taxable perquisite under the Income-tax Act.

Conclusion

The rationalisation introduced in the Union Budget 2026–27 marks a significant step towards convergence and harmonisation between the Income-tax regime and the Provident Fund framework. By aligning exemption conditions, investment norms, and employer contribution limits with the EPF law, the reforms are expected to reduce disputes, enhance clarity, and better serve the interests of all stakeholders.

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