Budget 2026: PF trusts must meet EPF Section 17 norms to qualify for tax exemption; what does this mean

The Union Budget has proposed a major clean-up of the rules governing provident fund (PF) taxation by aligning income tax provisions with the Employees’ Provident Fund (EPF) framework. The move addresses long-standing inconsistencies between the Income Tax Act and EPF regulations that had created confusion for employers, PF trusts and employees, often leading to compliance difficulties and avoidable disputes.

A labour ministry statement said The Union Budget (2026-2027) has aligned the income tax framework governing recognised provident funds with the statutory and administrative provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees’ Provident Funds Scheme, 1952.

Until now, investment norms, eligibility for tax exemptions and limits on employer contributions were governed by overlapping and sometimes contradictory provisions under tax law and labour law. This lack of alignment made it unclear which private PF trusts qualified for tax benefits and how their funds should be invested. The government has now proposed to harmonise the two regimes so that PF taxation follows the same logic and standards as EPF regulations.

Tax exemption

A key change relates to eligibility for tax exemption. Under the new framework, recognition under the Income Tax Act, 2025 will be available only to PF trusts that are exempt under Section 17 of the EPF Act, 1952. Section 17 allows employers to manage their own PF trusts and seek exemption from filing monthly EPF returns, provided they follow EPF norms on contributions, investments and administration. By linking tax recognition directly to EPF exemption, the Budget removes ambiguity around which PF trusts qualify for tax benefits.

PF trusts

The Budget also aligns investment norms for PF trusts with EPF rules. Earlier, income tax provisions imposed a rigid cap that limited investments in government securities to 50 per cent. This restriction has now been removed. Going forward, PF trust investments will be governed entirely by the EPF framework and related regulations. This brings consistency between tax and labour laws and offers greater flexibility in managing retirement funds, while remaining within the EPF’s risk and safety guidelines.

PF employer contributions

Another important clarification relates to employer contributions. The Budget clearly sets a monetary ceiling of Rs 7.5 lakh per year for tax-efficient employer contributions to retirement funds. Contributions up to this limit will continue to remain tax-free, while any amount above Rs 7.5 lakh will be taxed as a perquisite in the hands of the employee. This replaces earlier percentage-based limits and parity rules that often caused uncertainty, particularly for high-salaried employees.

The rationalisation also simplifies how employer contributions are treated. The requirement that employer and employee contribution rates must be equal has been removed, as has the provision that automatically taxed employer PF contributions exceeding 12 per cent of salary. Employers can now contribute more than 12 per cent of salary to a provident fund without triggering an immediate tax liability, as long as the overall Rs 7.5 lakh annual cap across PF, NPS and superannuation funds is not breached.

The Employees’ Provident Fund Organisation (EPFO) has welcomed the changes, noting that they bring much-needed convergence between tax law and EPF regulations. By clearly linking tax exemptions to EPF approval, aligning investment rules, and standardising contribution limits, the reforms are expected to reduce litigation, simplify compliance for employers, and provide greater certainty for employees. Overall, the rationalisation is seen as a step towards a more coherent and predictable framework for retirement savings in India.