Clause 111 of the Finance Bill, 2026 seeks to amend Schedule XI to the Income-tax Act, 2025, which prescribes the conditions for recognition, contribution limits, and investment norms applicable to recognised provident funds (RPFs).
The proposed amendments are intended to remove legacy concepts embedded in Schedule XI and to align the income-tax framework governing provident funds with the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act) and the Employees’ Provident Fund Scheme, particularly in light of the absolute monetary ceiling of ₹7.5 lakh on aggregate employer contributions under section 17(1)(h) of the Income-tax Act, 2025.
All amendments will take effect from 1 April 2026, i.e., tax year 2026-27 onwards.
Background: Why Schedule XI Required Rationalisation
Schedule XI carries forward several concepts that were relevant under earlier provident fund regimes, such as:
- Percentage-based contribution limits
- Employer–employee contribution parity
- Salary-linked thresholds
- Rigid statutory investment caps
Over time, the EPF framework has evolved into a monetary-cap based and regulation-driven system, while income-tax provisions continued to reflect older structural assumptions, resulting in overlap and inconsistency.
Clause 111 of the Finance Bill 2026 addresses this misalignment.
Key Amendments Proposed Under Clause 111
1. Replacement of Percentage-Based Limits with a Uniform Monetary Cap
What is amended: The following provisions are proposed to be omitted:
- Paragraph 4(c), Part A – which restricted employer contributions based on parity with employee contributions and required annual crediting
- Paragraph 6(a), Part A – which deemed employer contributions in excess of 12% of salary as income of the employee
Meaning: Employer contribution limits will now be governed exclusively by the absolute monetary ceiling of ₹7.5 lakh under section 17(1)(h). Percentage-of-salary and parity-based restrictions are fully removed
Implications: Eliminates parallel and overlapping limits. Simplifies compliance by applying one uniform monetary threshold.
2. Removal of Discretionary Relaxation Based on Obsolete Salary Thresholds
What is amended: Provisions permitting discretionary relaxation of contribution parity based on:
- Salary threshold of ₹500, or
- Contingent bonus structures
(specifically Paragraph 5(4), Part A) are proposed to be omitted.
Meaning: Salary-based distinctions that no longer have relevance are removed. Contribution regulation is fully detached from employee salary levels.
3. Alignment of Recognition Eligibility with EPF Act Exemptions
What is amended: Paragraph 4(f), Part A is amended 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, 2025.
Meaning: Income-tax recognition is now expressly contingent on EPF Act exemption. Removes ambiguity regarding eligibility for recognition.
4. Removal of Differential Treatment for Employee-Shareholders
What is amended: Paragraph 1(d), Part C, which prescribed separate limits for employees who are also shareholders of the employer company, is proposed to be omitted.
Meaning: Employee-shareholders will be treated identically to other employees. Aligns Schedule XI with the EPF Act and EPF Scheme, which do not recognise such a distinction.
5. Rationalisation of Provident Fund Investment Restrictions
What is amended: Paragraph 1(e), Part C, which restricted investment in Government securities to 50%, is proposed to be amended.
Meaning: The rigid statutory cap is removed. Investment limits will be governed by EPFO investment pattern and Rules and notifications issued under the EPF framework.
Implications: Greater flexibility in investment allocation and continued regulatory oversight through labour law, not tax law.
What the Amendment Does Not Do
- ❌ It does not change the ₹7.5 lakh monetary cap itself
- ❌ It does not alter employee contribution limits
- ❌ It does not increase tax incidence on provident fund balances
- ❌ It does not affect withdrawal taxation provisions
The amendment is structural and harmonising, not revenue-augmenting.
Effective Date
✔ All amendments take effect from 1 April 2026. Applicable to tax year 2026-27 and subsequent years.
Overall Implications
- 📌 Single, uniform monetary ceiling replaces fragmented limits
- 📌 Full alignment between income-tax law and EPF law
- 📌 Reduced compliance complexity for employers and trustees
- 📌 Modernised, regulation-driven investment framework
Conclusion
Clause 111 of the Finance Bill, 2026 represents a comprehensive rationalisation of Schedule XI of the Income-tax Act, 2025. By removing outdated salary-based concepts, eliminating percentage-linked limits, aligning recognition conditions with the EPF Act, and modernising investment restrictions, the amendment brings clarity, consistency, and legal coherence to the taxation framework for recognised provident funds.
The change is best viewed as a technical alignment and clean-up exercise, ensuring that income-tax provisions mirror the current provident fund regulatory reality.
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