EPFO Welcomes Tax Alignment for Provident Funds in Budget

The Employees’ Provident Fund Organisation (EPFO) has welcomed the Union Budget 2026–27 proposal to rationalise the income tax framework governing recognised provident funds, calling it a long-overdue reform that will bring clarity, reduce litigation, and improve ease of compliance for all stakeholders.

Until now, recognised provident funds were regulated under two parallel legal frameworks. While Schedule XI of the Income Tax Act, 2025, governed tax recognition, exemptions and operational aspects were administered under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Differences between the two regimes—covering eligibility for tax exemptions, investment norms, and limits on employer contributions—often resulted in confusion and avoidable disputes.

The Budget 2026–27 addresses these issues by aligning income tax provisions with the statutory and administrative framework of the EPF Act, 1952, and the Employees’ Provident Funds Scheme, 1952. According to the revised provisions, recognition under the Income Tax Act will now be granted only to those provident funds that have obtained exemption under Section 17 of the EPF Act. This change clearly establishes that tax exemption for provident funds will be determined strictly under EPF law.

The Budget also brings clarity on investment norms. It specifies that investment patterns for recognised provident funds will continue to be regulated by the EPF framework and its subordinate legislation. Significantly, the earlier rigid ceiling that capped investment in government securities at 50 per cent has been removed, allowing greater flexibility in managing fund portfolios.

Another key change relates to employer contributions. The Budget introduces a monetary ceiling of ₹7.5 lakh on the employer’s contribution to provident funds. Any amount contributed beyond this limit will be treated as a taxable perquisite under income tax provisions, bringing uniformity and certainty to tax treatment.

EPFO said the rationalisation will help harmonise the income tax regime with provident fund legislation, reduce ambiguity, and safeguard the interests of both employees and employers. The organisation added that the reforms are expected to improve compliance and streamline administration.

Detailed provisions are available in the Finance Bill, along with explanatory FAQs issued by the Central Board of Direct Taxes (CBDT).