Budget 2026: PF rule clean-up simplifies tax treatment, keeps limits intact

Retirement savings streamlined by removing 12% tax ceiling on employer Provident Fund contributions and providing companies with a compliance cushion for tax deductions on employee welfare deposits

The Budget on Sunday proposed simplifying rules for recognised provident funds (RPFs) and eased the tax compliance deadline for employers depositing employee provident fund (PF) and employee state insurance (ESI) contributions. The technical changes will have limited impact on most salaried employees, while providing relief to some people.

 

No change in tax slabs

“In terms of tax outflow of a salaried employee, there is no major change proposed in Budget 2026. Individual income-tax rates remain the same as last year with no specific changes in any tax exemption or deduction limits,” said Preeti Sharma, partner for global mobility services, tax and regulatory advisory at tax advisory firm BDO India.

 

The New Income Tax Act, 2025, which becomes effective in April this year, will simplify the interpretation of tax laws and the impact of the Budget proposal will be known once detailed rules are notified, she said.

 

One notable PF-related tweak creates a planning window for higher employer contributions.

 

“As per the old law, the employer’s contribution to provident fund above 12 per cent of PF salary was considered a taxable perquisite. Budget 2026 proposes to remove this 12 per cent restriction. If the combined employer contribution to PF, NPS and superannuation stays within the overall Rs 7.5 lakh annual cap, it can remain tax-free,” Sharma said.

 

What PF rationalisation means for employees

According to Sharma, the RPF rationalisation is largely structural but helpful.

 

Key points include:

 

• No change in the Rs 750,000 annual tax-free cap on employer contributions across PF, NPS and superannuation
• Removal of the rule that forced parity between employer and employee PF contribution rates
• Removal of the provision that taxed employer PF contribution above 12 per cent of salary
• This means employers can contribute more than 12 per cent of salary to PF without automatically triggering a tax perquisite, provided the overall cap is not breached.

 

Employer deposit deadline: tax relief, not labour-law relief

 

The Budget relaxed the terms for employers to claim tax deduction on employee PF/ESI contributions.

 

“The due date to deposit PF/ESI contribution remains the same under respective laws. The change is only for tax deduction eligibility. Employers can now claim deduction if they deposit contributions before the Income Tax return filing due date, even if they miss the labour law due date,” Sharma said.

 

She notes this is expected to reduce litigation driven by minor timing mismatches. “There have been cases where deductions were disallowed even when PF was deposited before return filing but missed the labour-law due date by a few days,” she says.