Income Tax on EPF Withdrawal

Have you ever wondered what happens when you decide to withdraw from your Employee Provident Fund (EPF)? EPF is not just a savings pot but a crucial element of your retirement planning. Let’s understand EPF, its withdrawal rules, and the tax on PF withdrawal so you can explore this aspect of your financial journey with ease and confidence.

What is EPF?

EPF is a retirement benefit scheme available to all salaried employees in India. Both the employee and the employer contribute a fixed percentage of the employee’s basic salary and dearness allowance every month. The beauty of the EPF lies in its dual role – it acts as a savings tool that accumulates over your working years and as a safety net for retirement or unforeseen financial needs. The interest earned on the EPF contributions is also compounded, adding to the growth of your savings.

When Can You Withdraw EPF?

When it comes to withdrawing from your EPF account, specific rules govern how and when you can do it:

Age and Service Duration

You can withdraw the full EPF balance upon retirement or after reaching 58 years of age. Partial withdrawals are allowed after five years of continuous service, under certain conditions like medical treatment, house purchase or construction, education or marriage of children, etc.

Early Withdrawals

If you withdraw from EPF before completing five years of continuous service, the amount becomes taxable. However, there are exceptions in cases like termination due to ill-health, business discontinuity, or other reasons beyond your control.

Full Withdrawal

Full withdrawal is permitted under specific circumstances like retirement, migration for employment abroad, or if a female member resigns for marriage, childbirth, or pregnancy.

TDS on Withdrawal

Tax Deducted at Source (TDS) applies to early withdrawals that exceed ₹50,000. However, if PAN is furnished and Form 15G/15H (as applicable) is submitted, TDS can be avoided.

EPF Withdrawal Eligibility

When it comes to withdrawing EPF, various scenarios arise. You might want to withdraw after retirement or due to some medical emergency. No matter what the case is, here are the eligibility criteria to follow:

Tax on EPF Withdrawal

It is important to have knowledge about income tax on EPF withdrawal. This will help you make informed decisions about when and how to withdraw your funds, increase your tax liability, and avoid potential penalties.

Tax on EPF Withdrawal before 5 years

Withdrawing from your EPF account before completing five years of continuous service can result in tax implications. Here’s how it works:

• Employer’s Contribution and Interest: Both the employer’s contribution and the interest earned on it are taxable.
• Employee’s Contribution: The employee’s contribution is also taxable if a tax deduction was claimed under Section 80C when the contribution was made.
• Interest on Employee’s Contribution: The interest earned on the employee’s contribution is taxable.

The withdrawn amount is added to your income for the year and taxed according to your income tax slab.

Tax on EPF Withdrawal by Temporary Employee

Temporary employees or those who have not completed five years of continuous service face similar tax implications as those withdrawing before five years:

• Employer’s Contribution and Interest: Taxable.
• Employee’s Contribution: Taxable if Section 80C benefits were availed.
• Interest on Employee’s Contribution: Taxable.

For temporary employees, the key point is the continuous service period. If they do not complete five years, the withdrawal is treated as taxable income.

Tax on EPF Withdrawal from an Unrecognized EPF

Withdrawals from an unrecognized EPF are fully taxable. This includes:

• Employer’s Contribution and Interest: Taxable.
• Employee’s Contribution: Taxable if Section 80C benefits were claimed.
• Interest on Employee’s Contribution: Taxable.

Unrecognized provident funds are not approved by the Commissioner of Income-tax, making the entire amount taxable upon withdrawal.

Tax on EPF Withdrawal after 5 years

If you withdraw from your EPF after completing five years of continuous service, the withdrawal is tax-exempt. This applies to:

• Employer’s Contribution and Interest: Not taxable.
• Employee’s Contribution: Not taxable.
• Interest on Employee’s Contribution: Not taxable.

This tax exemption also applies if the service period is less than five years due to reasons like an employee’s ill health, business discontinuation, or other reasons beyond the employee’s control.

Rates of TDS

The rates of Tax Deducted at Source (TDS) on EPF withdrawals are as follows:

• Standard TDS Rate: 10% if PAN is provided and the withdrawal amount exceeds ₹50,000.
• Without PAN: If PAN is not provided, TDS is deducted at the maximum marginal rate (usually 34.608%).
• Threshold Limit: No TDS is deducted if the withdrawal amount is less than ₹50,000.
• Form 15G/15H: Submission of Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) can prevent TDS if the total income is below the taxable limit.

Table on Taxability on Withdrawal of EPF

Let us take a quick look at the taxability of EPF for employees in different conditions:

How to Avoid TDS on EPF Withdrawal?

There are several instances where EPF withdrawals are exempt from tax, which include:

After Completion of 5 Years of Service

Withdrawals after five continuous years of service are not subject to tax. This period includes service with previous employers if the EPF balance was transferred from the previous employer to the current one.

In Case of Employee’s Ill Health

Withdrawals due to the ill health of the employee, discontinuation of business, or any other reason beyond the employee’s control are exempt from tax.

Upon Retirement

Withdrawals made after reaching 58 years of age or upon retirement are tax-exempt.

Partial Withdrawals for Specific Purposes

Certain partial withdrawals from EPF for specific purposes, such as medical treatment, marriage, education, or home loan repayment, are exempt from tax and subject to certain conditions.

FAQs on Tax on PF Withdrawal