The Finance Bill, 2026 proposes a comprehensive rationalisation of Schedule XI relating to recognised provident funds to align income-tax provisions with the modern framework under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the EPF Scheme. Several legacy, percentage-based and salary-linked restrictions are proposed to be removed in view of the uniform monetary cap of ₹7.5 lakh on aggregate employer contributions prescribed under section 17(1)(h) of the Income-tax Act, 2025. The amendments omit provisions mandating parity between employer and employee contributions, discretionary relaxations based on outdated salary thresholds, and the 12% salary-based ceiling on employer contributions. Distinct limits for employee-shareholders are also proposed to be removed. Further, eligibility for recognition of provident funds is clarified to require exemption under section 17 of the EPF Act. Investment restrictions are rationalised by removing the rigid cap on government securities, aligning them with prevailing EPF investment norms. These changes take effect from 1 April 2026.
Rationalisation of Schedule XI relating to Provident Funds
The provisions relating to recognised provident funds contained in Schedule XI to the Act carry forward certain legacy concepts that need alignment with the framework under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees’ Provident Fund Scheme, 1952. In view of the evolution of the provident fund regulatory regime and the introduction of an absolute monetary cap on employer contributions under section 17(1)(h) of the Act, it is proposed to rationalise and align the income-tax provisions governing recognised provident funds with the prevailing EPF framework.
2. The provisions of paragraph 4(c) of Part A of Schedule XI of the Act restrict employer contributions by reference to parity with employee contributions and mandates annual crediting of such contributions. As a unified monetary ceiling of ₹7.5 lakh on aggregate employer contributions has been prescribed under section 17(1)(h), it is proposed to omit Paragraph 4(c).
3. The provisions of paragraph 4(f) of Part A of Schedule XI govern eligibility for recognition of provident funds with reference to exemption from the EPF Scheme. It is proposed to amend Paragraph 4(f) to clarify that only provident funds which have obtained exemption under section 17 of the EPF Act may apply for recognition under the Income-tax Act.
4. The provisions of paragraph 5(4) of Part A of Schedule XI permit discretionary relaxation of employer–employee contribution parity based on a salary threshold of ₹500 or contingent bonus structures. As a unified monetary ceiling of ₹7.5 lakh on aggregate employer contributions has been prescribed under section 17(1)(h), it is proposed to omit Paragraph 4(c).
5. The provisions of paragraph 6(a) of Part A of Schedule XI deem employer contributions in excess of twelve per cent of salary as income of the employee. This percentage-based restriction overlaps with the unified monetary ceiling prescribed under section 17(1)(h), resulting in a parallel limitation. Therefore, it is proposed to omit Paragraph 6(a).
6. The provisions of paragraph 1(d) of Part C of Schedule XI prescribe differentiated limits for employees who are also shareholders of the employer company. Such a distinction is not recognised under the EPF Act or the EPF Scheme and overlaps with the unified monetary ceiling prescribed under section 17(1)(h). It is accordingly proposed to omit Paragraph 1(d) of Part C.
7. The provisions of paragraph 1(e) of Part C of Schedule XI restrict investment of provident fund monies in Government securities to fifty per cent. This ceiling is inconsistent with the current investment norms prescribed by the Ministry of Labour and Employment and the Employees’ Provident Fund Organisation, which permit higher exposure. It is proposed to amend Paragraph 1(e) to remove the rigid statutory cap, while retaining regulatory oversight through subordinate legislation under the EPF framework.
These amendments shall take effect from the 1st day of April, 2026, and shall apply in relation to the tax year 2026-27 and subsequent tax years.
[Clause 111]
Extract of Relevant Clauses of Finance Bill, 2026
Clause 111 of the Bill seeks to amend Schedule XI to the Income-tax Act, 2025 relating to recognised provident funds.
It is proposed to amend the provisions of the said Schedule to align with the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees’ Provident Fund Scheme, as follows: ––
i. to align the treatment of employer contributions with the aggregate monetary cap prescribed under section 17(1)(h) of the Income-tax Act, 2025, and the Employees’ Provident Fund framework;
ii. to reflect that exemption from schemes under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 is governed by that Act;
iii. to omit the discretionary relaxation of contribution parity based on salary thresholds that are no longer relevant, in order to align the provision with the monetary limit prescribed under section 17(1)(h) of the Income-tax Act, 2025;
iv. to align the limits on employer contributions with the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the absolute monetary ceiling provided under section 17(1)(h) of the Income-tax Act, 2025;
v. to remove the applicable limits for employee-shareholders as no such limit exists in the Employees’ Provident Fund framework and to align it with the uniform cap prescribed under section 17(1)(h) of the Income-tax Act, 2025; and
vi. to amend the provisions which restrict investment in Government securities, to align the Schedule with prevailing Employees’ Provident Fund investment norms.
These amendments will take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-2027 and subsequent years.
Extract of Relevant Amendment Proposed by Finance Bill, 2026
111. Amendment of Schedule XI.
In Schedule XI to the Income-tax Act,––
(a) in Part A,––
(i) in paragraph 4,––
(A) clause (c) shall be omitted;
(B) for clause (f), the following clause shall be substituted, namely:—
“(f) the fund shall be a fund––
(i) of an establishment to which the provisions of section 1(3) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 apply; or
(ii) of an establishment notified by the Central Provident Fund Commissioner under section 1(4) of the said Act,
and such establishment shall obtain exemption under section 17 of the said Act from the operation of all or any of the provisions of any scheme as referred to in that section;”;
(ii) in paragraph 5, sub-paragraph (4) shall be omitted;
(iii) for paragraph 6, the following paragraph shall be substituted, namely:—
“6. Employer’s annual contributions, when deemed to be income received by employee.—The portion of the annual accretion in the tax year to the balance of an employee in a recognised provident fund consisting of interest credited on the balance to the credit of an employee in so far as it is allowed at a rate exceeding such rate as fixed by the Central Government by notification, shall be deemed to have been received by the employee and included in his total income for that tax year and shall be liable to income-tax.”;
(b) in Part C, in paragraph 1,—
(i) clause (d) shall be omitted.
(ii) for clause (e), the following clause shall be substituted, namely:—
“(e) to regulate investment or deposit of the moneys of a recognised or an approved fund;”.
