Budget 2026: Review tax on NPS, Provident Fund contributions over ₹7.5 lakh, says BCCI; here's why

The Finance Act 2020 capped the exempt contribution that an employer can make towards employee welfare schemes such as recognised Provident Fund (PF), National Pension System (NPS) and Superannuation Fund at ₹7.5 lakh.

Any contribution to these employee welfare schemes over ₹.7.5 lakh is now treated as as a perquisite in the hands of the employee. Further, interest/dividend accrued on any contribution to employee welfare schemes made by the employer, exceeding ₹7.5 lakh is also taxed as a perquisite in the hands of the employees and the employer is required to deduct TDS on the same.

Ahead of Budget 2026, the Bombay Chambers of Commerce and Industry (BCCI) has suggested a review of the above rules which, it says, "discourage long-term investment and may even be contradictory to the principles of good tax governance."

In its pre-budget memorandum 2026, BCCI said, "The concept of Exempt-Exempt-Exempt (EEE) for social security schemes such as PF, SAF and NPS is being diluted for the high-income group. This may discourage long term investment and may even be contradictory to the principles of good tax governance. It is therefore requested to review section 17(2)(vii) i.e. on taxing Employer contribution beyond ₹7.5 akh and interest accretion thereon u/s 17(2)(viia)."

It further said that there is lack of clarity as to how the taxable perquisite amount is to be computed. Therefore, "CBDT should issue detailed guidelines to quantify perquisite u/s 17(2)(vii) and 17(2)(viia) in different circumstances like contributions to multiple funds, new joiners, employees leaving in middle of the year etc."

The BCCI also recommended that the Central Board of Direct Taxes (CBDT) should consider exempting the employers from salary withholding obligation on the annual accretions. The employees may be directed to report the income directly in their income tax returns.

Four issues flagged by BCCI

• There is ambiguity regarding which fund should be picked for excess contribution if there is a contribution by the employer to both EPF and NPS.

• PF and SAF interest rates are declared after the close of the financial year. It is not very clear as to how the same would be taken for tax computation in the previous year.

• Income on NPS account is a notional gain on a year-on-year basis as there is change only in net asset value of the fund. It is not clear as to how income on NPS for employer’s contribution exceeding the specified limit will be taxed annually as no real income gets credited to the employees’ account.

• The presumption made in the formula that withdrawals are out of past exempt contributions/accretions is averse to the taxpayer and will trigger perquisite taxation till the balance is fully withdrawn.

Finance Minister Nirmala Sitharaman is expected to present Union Budget 2026 speech in the Parliament on February 1, 2026.