In the Union Budget for 2026–27, Finance Minister Nirmala Sitharaman proposed a key change to how employer contributions to retirement funds are treated. Starting 1 April , 2026, a uniform annual cap of Rs 7.5 lakh will apply to contributions made by employers to recognised provident funds, the National Pension System (NPS), and approved superannuation funds.
Currently, contributions above this limit are taxable in the hands of employees under the Income-tax Act. The new proposal wishes to align this tax rule with the Employees’ Provident Funds (EPF) Act, which already applies the same ceiling without differentiating between employees based on salary levels or shareholder status. This means the tax and labour laws will now follow the same principle, making compliance simpler and more consistent.
The Bill also makes it clear that exemptions from provident fund schemes will continue to be governed by the EPF Act, and not the Income-tax law.
Additionally, restrictions on how provident funds invest in government securities will be updated to match current EPF investment norms.
The government explained that the purpose of these changes is to remove outdated provisions, ensure consistency between tax and labour regulations, and make life easier for employers managing retirement benefits. By harmonising the rules, the system becomes clearer and fairer for both employers and employees.
These amendments will take effect from 1 April, 2026, and apply to the financial year 2026–27 onwards. The proposal ensures that employer contributions to retirement funds across different schemes are treated uniformly, reducing confusion and aligning tax rules with existing labour laws.