Hidden Tax Burden on Retirement Savings: NPS, EPF and Superannuation Under Pressure Ahead of Budget 2026

Saving for retirement is one of the most important financial goals for salaried individuals. Schemes like Employees’ Provident Fund (EPF), National Pension System (NPS), and Superannuation are widely considered safe and tax-free avenues for long-term wealth creation. Most investors believe these plans follow the Exempt–Exempt–Exempt (EEE) model, where contributions, returns, and withdrawals are all tax-free.

However, the reality is far more complex. Due to multiple contribution caps and taxation rules, retirement savings are not completely tax-free. In fact, in certain situations, the same money can be taxed more than once. With rising salaries and inflation, these limits have become increasingly restrictive, raising hopes that Budget 2026 may finally offer relief.

Retirement Funds Are Not Fully Tax-Free

The EEE benefit in EPF, NPS, and Superannuation applies only up to specified limits. Once these thresholds are crossed, additional contributions and even the interest earned can become taxable. This means that despite locking money away for decades, investors may still face a tax burden without having access to the funds.

Both employee and employer contributions are governed by separate tax rules, and exceeding the prescribed limits can trigger taxation at different stages.

Different Tax Rules for Employee and Employer Contributions

In EPF, the employer’s contribution is tax-free only up to a combined annual limit of ₹7.5 lakh across EPF, NPS, and Superannuation. Any interest earned on the excess contribution becomes taxable. On the employee side, tax deduction under Section 80C is capped at ₹1.5 lakh, including Voluntary Provident Fund (VPF). Contributions beyond this can attract tax on interest.

For NPS, the employer’s contribution is tax-exempt up to 14% of basic salary plus DA, subject to the overall ₹7.5 lakh limit. At retirement, only 60% of the corpus can be withdrawn tax-free. The remaining amount must be used to buy an annuity, and the pension received from it is fully taxable.

In Superannuation, the employer’s contribution is tax-free only up to ₹1.5 lakh. Any excess contribution and returns earned on it may be taxed. At retirement, only one-third of the accumulated corpus can be withdrawn tax-free, while the rest is converted into a taxable pension.

Employer Contribution: Tax Overview

• EPF: Tax-free up to ₹7.5 lakh combined limit; interest on excess is taxable; withdrawal tax-free after 5 years

• NPS: Employer contribution exempt up to limits; 60% withdrawal tax-free; pension fully taxable

• Superannuation: ₹1.5 lakh contribution exempt; partial withdrawal tax-free; pension taxable

Employee Contribution: Tax Overview

• EPF: 80C deduction up to ₹1.5 lakh; interest taxable on contributions above ₹2.5 lakh (₹5 lakh for government employees)

• NPS: Total deduction up to ₹2 lakh (₹1.5 lakh + ₹50,000); returns tax-free during accumulation; pension taxable

• Superannuation: 80C benefit up to ₹1.5 lakh; pension taxable

Triple Taxation Risk

If contribution limits are exceeded, investors may face taxation at three levels. First, the excess contribution can be taxed immediately. Second, the interest earned on that amount may be taxed annually. Third, the pension received after retirement is also taxable. Tax experts point out that this effectively turns NPS into an Exempt–Exempt–Tax (EET) product rather than EEE.

Outdated Limits in a High-Salary Era

The ₹7.5 lakh employer contribution cap and ₹2.5 lakh EPF employee contribution limit were set years ago. With rising salaries and inflation, these limits now seem outdated. Experts believe these thresholds should be raised significantly to reflect current income levels and encourage long-term retirement savings.

Will Budget 2026 Bring Relief?

Financial advisors are hopeful that Budget 2026 will address these concerns by increasing contribution limits and making NPS withdrawal rules more flexible. Until then, salaried individuals may need to diversify retirement savings across different instruments to reduce tax exposure.

As retirement planning becomes increasingly complex, meaningful reforms in Budget 2026 could play a crucial role in easing the tax burden on the middle class and strengthening long-term financial security.