Union Budget 2026: Simplified Provident Fund Taxation and Employer Compliance Reforms

Budget 2026 Proposal On Provident Fund And TDS Changes Explained: The Union Budget 2026 has proposed a set of structural reforms aimed at simplifying provident fund taxation, easing employer compliance, and rationalising tax deduction at source (TDS) provisions. One of the key changes relates to the due date for depositing employee contributions to provident fund (PF), Employees’ State Insurance (ESI), and similar welfare funds. Under the Budget 2026 proposal, employers will now be allowed to claim deductions for employee contributions deposited up to the due date of filing the income tax return. This replaces the earlier system where deductions were linked to fund-specific deadlines prescribed under various labour laws. The move is expected to reduce disputes and compliance pressure, particularly for employers managing multiple welfare funds, according to inputs shared by Dipika Agarwal, Direct Tax Committee Member at BCAS. The Budget also proposes significant reforms in the provident fund regime. Existing restrictions on employer contributions—such as parity-based limits, percentage caps, and credit timelines—have been removed. Instead, a uniform annual ceiling of Rs. 7.5 lakh has been prescribed for employer contributions across all retirement funds. Any contribution exceeding this limit will be taxable as a perquisite. Notably, employees who are also shareholders will not be subject to separate contribution limits, simplifying treatment in closely held entities. Another major change is in the recognition of provident funds. Only funds exempt under Section 17 of the EPF & MP Act, 1952 will qualify as “recognised" for tax purposes, ending the dual recognition framework and aligning all recognised PFs with EPFO standards. On the TDS front, interest awarded by Motor Accident Claims Tribunals to individuals has been exempted from TDS. The definition of “work" has also been expanded to explicitly include the supply of manpower, clarifying TDS applicability on such contracts. Small taxpayers will benefit from a simplified electronic process for applying for lower or nil TDS certificates, without routing applications through the Assessing Officer. Additionally, resident individuals and HUFs purchasing property from non-resident sellers will no longer be required to obtain a TAN. From 1 October 2026, tax can be deducted using PAN through a PAN-based challan-cum-statement.