PF exemptions to now align in full with EPFO rules

In a move aimed at enhancing ease of doing business and reducing litigations, the budget proposed to rationalise certain provisions for provident funds trusts, which were availing exemptions under the Schedule XI of the Income Tax Act, to fully align them with the exemptions applicable to the Employees’ Provident Fund Organisation (EPFO)

The budget did away with the requirement for employer contribution to match employee contribution to PF and taxability of employer contribution in excess of 12% of wages.

This has been done keeping in mind that employer contributions in aggregate to PF, New Pension System (NPS) and Superannuation Fund in excess of Rs 7.5 lakh per employee per annum are in any case taxable.


Further, for private provident fund trusts to obtain and retain income-tax recognition, the budget proposed to make it necessary for such trusts to obtain exemption under the Provident Fund Act. This is to ensure that such trusts comply with all regulations applicable under the Provident Fund Act, the budget clarified.

According to Saraswathi Kasturirangan, partner, Deloitte India, employer contribution to provident fund is specifically exempt from tax in the employees’ hands, irrespective of whether the individuals follow the regular tax regime or the simplified regime.

“The proposed amendment in Budget 2026-27 provides flexibility in terms of overall contributions and would also enable alignment with the provisions of labour codes where contributions are not linked to basic salary, but are linked to the new definition of wages,” Kasturirangan said.

It is more of a clarificatory change, according to Puneet Gupta, partner, people advisory services-tax, EY India. Since employer contribution exceeding Rs 7.5 lakh per employee per annum to these funds is already taxable, there is no need to have a separate 12% limit on employer contribution to private provident fund trust, he said.

The budget 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.