Employees’ Provident Fund (EPF) is a government-backed long-term investment tool for employees’ post-retirement life. It constitutes 12 percent of the basic salary each from the employer and employee. However, of the employer’s 12 percent contribution, 8.33 percent goes to the Employees’ Pension Scheme (EPS). The funds in the EPF account earn interest at rates prescribed by the government.
Though EPF is meant for long-term investment to provide support after retirement, an employee may choose to withdraw the amount earlier in certain cases. These funds may enjoy tax benefits; however, withdrawal is not always entirely tax-free. The taxability of the PF depends on the duration, fund size, and contributions. TDS deductions may also apply.
Before applying for withdrawal, the employee must check the tax liability, which depends primarily on the years of continuous service. Under Section 10(12) of the Income Tax Act, zero tax applies to the entire amount, including the employer’s contribution, employee’s contribution, and interest earned, if the employee has completed five continuous years of service.
Five continuous years of service does not imply that an employee must be associated with one employer throughout the period. Even if the employment is changed and the account is shifted from one establishment to another within five years, it would be considered continuous service.
Tax implications apply when the withdrawal is made within five years of continuous service. As per the Income Tax Act provisions, the PF withdrawal is taxed under the head “salary”, and taxability varies by the components.
The law, however, provides exemptions in certain cases, and the employee may also apply for tax deductions where applicable.
Withdrawal made under certain conditions enjoys tax benefits:
— Employee’s poor health condition
— Closure or discontinuation of the employer’s business
— Circumstances beyond the employee’s control
If the employee has not yet completed five years of service but qualifies for one of the mentioned conditions, TDS would not be deducted. TDS exemption will also apply if the withdrawn amount is less than Rs 50,000.
TDS implication
No TDS applies to the amount withdrawn, including the interest, after five years of continuous service.
No TDS applies if the amount withdrawn is less than Rs 50,000 and the employee has yet to complete five continuous years of service.
TDS is deducted at 10 percent if the amount withdrawn is Rs 50,000 or more, PAN details are furnished, and the employee has not completed five continuous years of service. TDS applies at a higher rate if PAN is not available.
Partial withdrawals for specified purposes such as education, housing, and marriage are governed under different provisions.
Employees with nil tax liability should submit Form 15G if they are below 60 years of age and Form 15H if they are senior citizens to avoid TDS on EPF withdrawals.
