Provident Fund Scheme 2026: Effective Date, Employee Contribution Choices and Practical Implications for Employers

The rollout of India's Labour Codes has brought a wave of interpretational questions for employers, specifically with respect to statutory payments. The only relief was transition period for PF and ESI. However, with Wage definition coming into effect, there was a doubt on whether PF is required to be paid on basic or wages and what is the benefit of transition period if it has to be paid on wages.

In the midst of this, the PF scheme 2026 has come into effect from July 2026. The new scheme while, remains the same in spirit, also raises questions on the effective date of the scheme with the transition period still in existence and the discretion to be provided to the employees to reduce their PF contribution and requirement and manner of joint declarations for voluntary PF. The implications of the new PF scheme on exempt PF trusts and international workers continues to be explored. This is a part of a 3-part article series on these various topics.

PF Scheme 2026: Effective date in the context of transition period

Section 164(2)(b) of the Code on Social Security, 2020 preserves the 1952 Scheme along with the Employees' Deposit Linked Insurance Scheme, 1976, the Employees' Pension Scheme, 1995, and the Tribunal (Procedure) Rules, 1997 and provides a one-year transition period to the extent these are not inconsistent with the Code. That transition period runs until November 2026.

The position is further clouded by the deliberations recorded under Agenda Item No. 28 of the draft minutes of the 239th Meeting of the Central Board of Trustees, EPF, held on 2 March 2026, which appear to suggest an administrative intent to operationalise the new framework prior to the expiry of the statutory transition period.

However, it is a well-settled principle of law that subordinate legislation cannot override, curtail, or operate contrary to the provisions of its parent statute. As the 2026 Scheme constitutes delegated legislation framed under the Social Security Code, it must be interpreted in a manner that is consistent with, and subordinate to, Section 164(2)(b). Where the parent statute expressly preserves the operation of the 1952 Scheme during the transition period, neither an administrative understanding nor a provision in subordinate legislation can negate or dilute that statutory saving. Consequently, to the extent Paragraph 1(2) of the 2026 Scheme is construed as bringing the 1952 Scheme to an end prior to November 2026, it would have to yield to Section 164(2)(b) of the Code.

Accordingly, the more tenable legal view is that the Employees' Provident Funds Scheme, 1952 continues to govern provident fund compliance until November 2026. As a corollary, compliance requirements introduced exclusively under the 2026 Scheme, including the filing of Form V, would not become mandatory until the expiry of the transition period.

That said, the controversy is largely academic from a practical standpoint. The scope of provident fund coverage, the rate of contributions, and the methodology for computation remain substantially unchanged under both schemes. Consequently, employers are unlikely to face any financial implications regardless of whether the 1952 Scheme or the 2026 Scheme is regarded as presently operative.

Statutory Minimum vs. Voluntary Higher Contributions

A separate and more consequential question is whether an employer may continue contributing PF at 12% of wages (rather than the statutory minimum) and, in turn, whether it may decline an employee's request to restrict their own contribution to the statutory minimum of Rs. 1,800 per month.

Mandatory PF contribution is pegged to the statutory wage ceiling of Rs. 15,000 per month. At 12%, this yields Rs. 1,800 per month. Any contribution above that ceiling, or at a rate above 12%, is voluntary and is not a statutory obligation under either the 1952 or the 2026 Scheme.

Voluntary Contributions Under the 2026 Scheme

Paragraph 19 of the 2026 Scheme codifies the voluntary character of above-ceiling contributions. It provides that an employee may opt to make an additional voluntary contribution on wages exceeding the statutory ceiling, at the statutory rate or higher, and that the employer must remit it via the Electronic Challan-cum-Return. The employer may make a matching contribution but is under no obligation to do so. Critically, either the employee or the employer may, at any time, opt to reduce or stop such additional voluntary contributions.

Although the 1952 Scheme contained no provision directly analogous to Paragraph 19, courts had long recognised, as a matter of settled precedent, that an employer's statutory obligation is co-extensive with the wage ceiling, and that anything beyond it is voluntary and may be discontinued at the contributing party's option. Paragraph 19 simply codifies this position with greater clarity.

SCENARIO	TOTAL REMUNERATION	WAGE	EMPLOYEE PF (EE)	EMPLOYER PF (ER)
1	1,00,000	50,000	1800	1800
2	1,00,000	50,000	6000	6000
3	1,00,000	50,000	6000	1800
4	1,00,000	50,000	1800	6000
5	1,00,000	50,000	20000	1800

The various options available under the Scheme for contributions are illustrated below: 

Practical Implications for the employers

1. Employee’s Right to opt for the Statutory Minimum Contribution

Under the 2026 Scheme, every employee must be given the option to restrict their own PF contribution to the statutory minimum of Rs. 1,800 per month. This is an employee-driven election and cannot be withheld by the employer. Once an employee exercises this option, the employer may decide how it wishes to structure its own contribution. It may either: (a) reduce its contribution to the statutory minimum as well; or (b) continue contributing at the higher rate as a matter of company policy.

Accordingly, employers should treat the employee’s right to opt down as mandatory, while treating the employer’s corresponding contribution level as a deliberate policy decision. The employer’s approach should be clearly documented and applied consistently.

2. Joint Declarations Where Contributions Are Confined to Basic

Employers that have historically calculated PF contributions on Basic wages may need to consider whether a joint declaration would be required once the 2026 Scheme comes into effect. The joint declaration mechanism is intended to facilitate PF contributions on wages exceeding the statutory ceiling. Where an employer has been calculating contributions on Basic wages and those wages remain within the statutory ceiling, there is a reasonable basis to take the position that a joint declaration is not triggered. However, the 2026 Scheme does not conclusively settle this question. Until further clarification is issued, employers following this approach should:

(a) document the basis for their interpretation;

(b) maintain appropriate records; and

(c) be prepared to obtain the necessary declarations if subsequent clarification establishes that they are mandatory.

3. Frequency of the Switch Option

The 2026 Scheme does not prescribe how frequently employees must be permitted to exercise or change this option. This leaves employers with some flexibility to determine the administrative process.

To manage the operational burden, employers may reasonably establish defined intervals, for example, allowing employees to change their contribution level once a year or during specified enrolment windows. Any such policy should, however, preserve the employee’s substantive right to elect the applicable contribution level. The frequency or process should not, in effect, make the statutory option difficult or impractical to exercise.

4. CTC Impact and Reallocation

A further issue arises where an existing employee’s CTC has been structured on the basis of a higher employer PF contribution. If the employer reduces its PF contribution to the statutory minimum following the employee’s election, the resulting differential would generally need to be reallocated to another component of remuneration if the intention is to preserve the employee’s overall CTC.

This position is supported by Section 124 of the Code on Social Security, 2020, which prohibits reduction of total employment benefits on account of PF liability. The Company may have to relook at the wage structure for 50-50 calculation in light of the same.

5. Income Tax Implication of Reduced PF Contributions

Any change in PF contribution levels can also have income-tax implications. Broadly, if an employee reduces their own PF contribution, their take-home pay increases. For employees opting for the Old Tax Regime, however, this also means a higher taxable income because the employee gets a smaller deduction for their PF contribution under the applicable provisions of the Income-tax Act. No corresponding deduction is available under the New Tax Regime.

Conclusion

Employers should distinguish between rights that the 2026 Scheme requires them to preserve and choices that remain within their policy discretion. In particular, the employee’s right to opt for the statutory minimum contribution should be treated as mandatory, while the employer’s own contribution level, the frequency of elections, and the treatment of CTC differentials should be addressed through a clearly documented and consistently applied policy.

Employers retain flexibility to design differentiated remuneration structures depending on the PF option each employee selects, to independently cap their own contribution at the statutory minimum, and to impose reasonable procedural safeguards provided the arrangements are transparent, properly documented, and consistently applied.

Companies should also take advantage of the transition period provided under the Code to operationalise the revised framework under the Scheme, including designing and implementing processes for the various PF contribution options, establishing mechanisms for employee elections, updating payroll and HR systems, and preparing for any filings, disclosures, or administrative requirements under the new regime. Early planning during this period will help employers ensure a smooth and compliant rollout while minimizing operational disruption and employee confusion.

[The authors are Executive Partner, Associate Partner and Associate, respectively, in Employment Law practice at Lakshmikumaran & Sridharan Attorneys]