Taxation

Rules of tax on PF withdrawal – Whether withdrawal of EPF balance attracts TDS?

Over the years, the process of withdrawal of provident fund balance by an employee has been made simpler by the Employees’ Provident Fund Organization (EPFO). The members of EPFO can apply for PF withdrawal online, and the money gets credited to the member’s account within a reasonable timeframe. In this article, you will gain an insight of TDS implications on withdrawal of money from EPF (or what percentage of tax on PF withdrawal is charged).

Tax on PF Withdrawal

Enacted in the year 1952, EPF acts as an effective tool for individuals to accumulate their savings for meeting retirement benefits. To ensure that investment towards PF is spurred, the EPFO effected that employees having 5 years of service are eligible for tax-free withdrawal from PF accounts. Also, an additional advantage is that contributions to the Employee Provident Fund are tax-deductible under Section 80C. However, employees withdrawing money before the completion of 5 years of service are subject to income tax on PF withdrawal if certain specified criterion is not met. To line-up the aforesaid points together, it can be said that tax on PF withdrawal is levied under certain situations, while the same is exempt under some other situations.

According to EPFO rules, up to 75% of the accumulated EPF corpus can be withdrawn by employees after one month of exiting from a job. The remaining 25% may be withdrawn after unemployment for more than two months.

Which portion of withdrawals is taxed?

The EPF corpus is divided into four parts, namely employer’s contribution, employee’s contribution, interest earned on the employer’s contribution and interest earned on employee’s contribution.  

On EPF withdrawal:

• Employee’s contribution is not taxed. But in case, Section 80C exemption is claimed by an assessee for prior periods, an additional tax may be required to be paid by him presuming such exemption was reversed.
• Interest earned on employee’s contribution is taxed as income from other sources.
• Employer’s contribution and interest earned thereon is taxable as income from salaries. 

Our Recommendation: Income Tax Changes to be expected in Budget 2020-2021

Detailed regulations of Tax on PF Withdrawal

The provisions of the tax deduction on PF withdrawal are as follows:

Amount of withdrawal	Service Period	Other conditions	Rates of TDS
Employee EPF withdrawal <Rs. 50,000	After any no. of years of service	N/A	No TDS
Employee EPF withdrawal >= Rs. 50,000	After 5 years of service	N/A	No TDS
Employee EPF withdrawal >= Rs. 50,000	Before 5 years of service	Transfer/Termination of service (ill-health/ closure/cause beyond the control of the employee)	No TDS
Employee EPF withdrawal >= Rs. 50,000	Before 5 years of service	PAN submitted; Form 15G/15H submitted	No TDS
Employee EPF withdrawal >= Rs. 50,000	Before 5 years of service	PAN submitted; Form 15G/15H not submitted	TDS @10%
Employee EPF withdrawal >= Rs. 50,000	Before 5 years of service	PAN not submitted	TDS @34.608%

No TDS/tax on PF withdrawal is deducted in the following cases:

• Where there is a transfer from one EPF account to another EPF account
• Where service is terminated on account of member’s ill health, or discontinuation of business by employer, or completion of the project or any other reason beyond the control of the member
• Where the EPF balance is withdrawn after the expiry of 5 years 
• Where the member has served employment for less than 5 years, and the EPF payment equals less than Rs. 50,000
• Where the member has served employment for less than 5 years, the EPF payment is equivalent to or more than Rs. 50,000, and Form 15G/15H is furnished along with PAN

On the other hand, TDS/tax on PF withdrawal is deducted in the following cases:

• Where the member has served employment for less than 5 years, the EPF payment is equivalent to or more than Rs. 50,000, and Form 15G/15H is not furnished provided PAN is submitted:

Here, TDS is to be deducted @ 10%.

(Form 15G/15H is a self-declaration form which is furnished to avoid TDS in cases where the income for a particular year is below the taxable limit, i.e., tax on total income including EPF withdrawal is nil. If such form is not submitted, then the taxpayer will have to claim a refund of TDS at the time of filing ITR at the end of FY, unless his income does not exceed the maximum taxable limit.)

• Where the member has served employment for less than 5 years, the EPF payment is equivalent to or more than Rs. 50,000, and PAN is not submitted

Here, TDS is to be deducted @ maximum marginal rate of 34.608%. 

Few key fundamentals 

• TDS is deducted at the time of making payment.

• TDS/tax on PF withdrawal is deducted in accordance with Section 192A of the Income Tax Act, 1961.

• Form 15H is meant for senior citizens (60 years & above), and Form 15G is meant for individuals having no taxable income. Both forms are self-declarations and may be accepted as such in duplicate.

• In the case of job switches, the period of employment served under all the previous employers is clubbed together to compute the continuous period of a member’s service. However, it should be marked that hiring on a temporary/contract basis where the employer does not contribute towards EPF corpus, is ignored for counting years of service.

• Withdrawals made from an unrecognized EPF (, i.e., one which is not approved by the Commissioner of Income Tax) are subjected to tax, irrespective of the number of years of completed service.

Takeaway

Tax on PF Withdrawal after 5 years:

After the completion of 5 years of continuous contributions towards the EPF, an employee is legally allowed to make a withdrawal which is not subject to TDS. Therefore, unless otherwise required, one should make an endeavor to allow EPF contributions to accumulate in one’s PF account since the accrued interest on the standing PF balance is tax-free.

Tax on PF Withdrawal before 5 years:

Before the completion of continuous service of 5 years, an employee is liable to pay TDS on withdrawal of his EPF balance. This can, however, be avoided if the assessee declares in Form 15G/15H, that his total income including such EPF withdrawal falls below the taxable limit. 

Also, Read Govt. Allows Taxpayers to File GSTR-3B Returns in a Staggered Manner