Employees Provident Fund change in Budget 2026: Employer contribution to be governed by ₹7.5 lakh ceiling

Union Budget 2026 has proposed to rationalise the provisions relating to recognised provident funds by deleting parity-based and percentage-based limits on employer contributions.

The proposal aims to remove salary-linked relaxations and shareholder-based distinctions. Further, it aims to align 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.

"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," Budget documents say.

The Union Budget has also proposed rationalising the due date to deposit employee contribution by the employer to claim such contribution as deduction.

"It is proposed that deduction of any amount of contribution received by the assessee being an employer, from an employee, shall be allowed as deduction in the hands of the assessee if such amount is credited by the assessee to the account of the employee, in any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, on or before the due date of filing of his return of income under section 263(1) of the Act," the Budget document says.

Here's an explainer on the proposed change as per an Income-tax Department's FAQs:

At present, provident funds are governed by Schedule XI of the Income-tax Act, 2025 under which they are recognised and are subject to certain restrictions, including parity-based limits on employer contributions, percentage caps on excess contributions, differentiated limits for employee-shareholders, and investment limits in Government securities, among others.

Budget 2026 has proposed to rationalize Schedule XI of the Income-tax Act, 2025 by deleting or amending certain provisions in Parts A and C to align the income-tax framework governing recognized provident funds with the statutory and administrative provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees’ Provident Fund Scheme, 1952 and other provisions in the Income-tax Act, 2025.

The provisions in Schedule XI of the Income-tax Act, 2025 that restrict employer contributions by reference to parity with employee contributions, annual crediting requirements or percentage-of-salary limits are proposed to be removed.

Employer contributions will now be governed by the aggregate monetary ceiling of ₹7.5 lakh prescribed under section 17(1)(h) of the Income-tax Act, 2025.