Finance Bill 2026: Key PF Changes Proposed for Employees and Employers

The Finance Bill 2026 has proposed important changes to recognised provident funds under the Income Tax Act, 2025. The aim is to simplify the tax rules around provident funds and align them more closely with the EPFO framework.

At present, recognised provident funds are governed by Schedule XI, which includes several restrictions on employer contributions, investment rules, and different treatment for certain employees. Budget 2026 proposes to delete or amend several of these provisions.

Employer Contribution Rules to Become Simpler

One of the biggest proposed changes is the removal of parity-based and percentage-based limits on employer contributions. The Bill also proposes to remove salary-linked relaxations and special rules for employee-shareholders.

Instead, employer contributions will be covered under the existing aggregate ceiling of ₹7.5 lakh, as prescribed under Section 17(1)(h) of the Income Tax Act, 2025. This ₹7.5 lakh limit applies collectively across employer contributions to PF, NPS, and superannuation funds.

In simple terms, employers will get more flexibility to structure compensation, as long as the total employer contribution does not exceed ₹7.5 lakh.

What Changes for Employees?

For employees, the overall benefit remains unchanged. Employer contributions up to ₹7.5 lakh will continue to remain tax-free.

If the employer’s contribution crosses this limit, the excess amount will be taxed as a perquisite. The Finance Bill also proposes to remove older provisions in Schedule XI that treated certain employer contributions as income under separate conditions.

Shareholder Employees to Get Equal Treatment

Earlier, Schedule XI had stricter conditions for employees who were also shareholders in the employer company. The Finance Bill 2026 proposes to remove these separate limits.

This means shareholder employees will now follow the same framework as all other employees, with the ₹7.5 lakh ceiling applying uniformly.

Investment Rules Made More Flexible

Another key proposal is the removal of the rule that required at least 50% of provident fund money to be invested in Government securities. The Bill proposes to remove this rigid cap.

Investment norms will continue to be governed by the EPF framework and relevant subordinate rules, rather than fixed tax-law limits.

Due Date for Depositing Employee PF Contributions

The Finance Bill also proposes an important compliance change. Employers will be allowed to claim a deduction for employee contributions deposited up to the Income Tax Return (ITR) filing due date, instead of the fund due date.

This aligns the treatment of employee contributions with employer contributions, reducing disputes and improving consistency.

Read more: Following STT Hike, SEBI Chair Signals No Near-Term Plans for F&O Market Restrictions.

Conclusion

Finance Bill 2026 proposes a simpler and more uniform provident fund framework. While employee tax benefits remain the same, employers may get more flexibility and a longer deadline for depositing employee contributions. These changes are expected to come into effect from April 1, 2026.

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