Income Tax on EPF Withdrawal

Contribution towards an EPF account provides a benefit to individuals by way of a deduction under Section 80 C. Let’s discuss what would be the income tax or TDS implications of EPF withdrawal. Interestingly, EPF withdrawal is taxable under certain circumstances and exempt under certain circumstances.

  1.  EPF is withdrawn before 5 years

If you withdraw from EPF before completing 5 years of continuous service, TDS will be deducted. In calculating 5 years of service, your tenure with the previous employer is also included. If you transfer your EPF balance from the old employer to a new employer and your total employment is 5 years or more, no TDS is deducted. Do remember that you must calculate the exact 5 years, there is no grace if you are short by a few days.

  1. Temporary employee for some part of 5 years

Say you have been hired for a temporary position or you are on contract for a certain period. During this period you are not on permanent rolls and the employer is not liable to contribute towards your EPF. After some time, you are brought on rolls and the employer begins your EPF contribution. You resign after completing 5 years. However, this period includes the months when you were not on permanent rolls and therefore the employer will deduct TDS from your EPF withdrawal since 5 years are not complete.

  1. Your EPF is an unrecognised EPF

A fund which is not approved by Commissioner of Income Tax, is considered an unrecognised provident fund. It may have been recognised by commissioner of provident fund or any other formal authority. But for a fund to enjoy income tax benefits of a recognised provided fund (where withdrawals are exempt after 5 years) it must be approved by a commissioner of income tax. If you are a member of URPF, your withdrawals are taxed, whether or not you have completed 5 years of service. Our tip: It helps to check with your employer about the status of your EPF.

  1. How are withdrawals taxed

Your EPF payout has 4 components.

  1. Your contribution/employee’s contribution
  2. Interest on your/employee’s contribution
  3. Employers contribution and interest on employer’s contribution
  4. Your contribution/Employee’s contribution– This is the amount contributed by you to your EPF. This portion of your withdrawal is not taxable. However, if you have claimed deduction under section 80C on your contribution in earlier years, you may have to pay additional tax as if 80C was not claimed by you for those years.
  5. Interest on your/employee’s contribution– This portion is taxed as income from other sources.
  6. Employer’s contribution and interest on employer’s contribution– Employer’s contribution and interest on it is fully taxable. It is taxed under the head salary in your tax return. When TDS is deducted on it, you are likely to see an entry under salary TDS in your Form 26AS for it.

Rates of TDS

TDS is deducted @ 10% on EPF balance if withdrawn before 5 years of service.Remember to mention your PAN at the time of withdrawal. If PAN is not provided TDS shall be deducted at highest slab rate of 30%.

You can submit Form 15G/Form15H if tax on your total income including EPF withdrawal is nil. TDS is not deducted if Form 15G/Form 15H is submitted.

  1. Table on taxability on withdrawal of EPF

The following table will help you easily understand the taxability on withdrawal of EPF:

Sl No

Scenario

Taxability

1

Amount withdrawn is < Rs 50,000 before completion of 5 continuous years of service

No TDS. However, If the individual falls under the taxable bracket, he has to offer such EPF withdrawal in his return of income

2

Amount withdrawn is > Rs 50,000 before completion of 5 years of continuous service

TDS @ 10% if PAN is furnished; No TDS in case Form 15G/15H is furnished

3

Withdrawal of EPF after 5 years of continuous service

No TDS. Further, the individual need not offer the same in the return of income as such withdrawal is exempt from tax

4

Transfer of PF from one account to another upon a change of job

No TDS. Further, the individual need not offer the same in return of income as it is not taxable.

5

Before completion of 5 continuous years of service\ if employment is terminated due to employee’s ill health The business of the employer is discontinued or the reasons for withdrawal are beyond the employee’s control

No TDS. Further, the individual need not offer the same in the return of income as such withdrawal is exempt from tax

 

  1. How to avoid TDS on EPF withdrawal?

Here are a few ways of avoiding TDS on EPF withdrawal:

  • When you change jobs, try not to withdraw the EPF amount and transfer it to the new account at your new company.
  • If you can defer withdrawing funds from your account for five years (continuous service with all employers), withdrawals thereafter will not attract any TDS.

If withdrawal amount is less than Rs 50,000, no TDS is deducted.

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