TDS on PF Withdrawals

What is TDS?

TDS is an upfront tax collection mechanism that levies its share as income is generated, rather than waiting for you to pay later. In simple words, you earn a salary, interest, or rent, and the payer deducts a percentage immediately before handing over the rest.

This mechanism extends to EPF withdrawals under particular circumstances. If you withdraw your EPF prematurely, before completing 5 continuous service years, you will face TDS deductions if the amount exceeds ₹50,000. Your Form 26AS displays deducted TDS amounts, enabling credit claims during Income Tax Return (ITR) filing. If excess TDS is deducted and your total income is below the taxable thresholds, you can claim a refund.

You can check how much TDS has been deducted in your Form 26AS and claim credit for it while filing your Income Tax Return (ITR). If excess TDS on PF withdrawal was deducted, and your total income is below the taxable limit, you can claim a refund while filing your return.

Why TDS Matters?

TDS on PF withdrawal matters because it helps streamline tax compliance and ensures fair tax collection on premature withdrawals (before 5 years of continuous service).

• Ensures Timely Tax Collection: When someone withdraws their PF before completing 5 years of continuous service, TDS ensures income tax on PF withdrawal is collected upfront on the amount, helping the government get its due share without waiting for the taxpayer to file a return.

• Brings Early Withdrawals Under Tax Net: Many people may not report premature PF withdrawals on their tax returns. TDS helps cover such cases by automatically deducting tax at source, bringing more transparency.

• Avoids Tax Evasion: Even if someone does not file income tax returns, TDS deducted from PF withdrawal ensures some tax is still collected, minimizing the chance of full tax evasion.

• Eases Tax Compliance for Employees: For individuals who do file returns, TDS provides a clear record of tax already paid on the withdrawn amount, which helps in adjusting final tax liability or claiming a refund, if eligible.

• Helps Track Withdrawals and Tax Paid: TDS creates a paper trail in Form 26AS and ensures proper documentation for both employees and the Income Tax Department.

What is Section 192A of the Income Tax Act?

Section 192A of the Income Tax Act, 1961 deals with TDS (Tax Deducted at Source) on premature withdrawals from the Employees’ Provident Fund (EPF). This section ensures that if an employee withdraws their EPF amount without meeting certain conditions (like completing 5 years of continuous service), then TDS will be deducted from the amount withdrawn.

This tax on EPF withdrawal rule was introduced in the Finance Act, 2015, and it applies to all EPF withdrawals made before the specified conditions are fulfilled. The deduction is made at the time of payment by the EPF trust or organization.

TDS Return Filing Due Dates:

EPF Withdrawal Eligibility

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

Reasons for Partial Withdrawal of EPF

The Employees’ Provident Fund Organization (EPFO) permits the partial withdrawal of the EPF balance for various significant life events. This facility provides a financial cushion to members during times of need.

Some of the primary reasons for which you can make a partial, premature withdrawal from your EPF account include:

• For urgent medical treatment for yourself, your spouse, your children, or your parents.
• For the post-matriculation education of oneself or children.
• For the marriage expenses of oneself, a son, a daughter, a brother, or a sister.
• For buying a plot of land or constructing/purchasing a residential house.
• For paying off an outstanding home loan.
• For making additions or alterations to an existing house.

Taxability on EPF withdrawals

The tax on PF withdrawal depends primarily on one key factor: the duration of your continuous service. The general rule is simple: five years of continuous service makes withdrawals tax-free. If you withdraw early, the amount becomes taxable income in that year.

TDS on EPF Withdrawal Before 5 years

If you withdraw from your EPF account before completing five continuous years of service, the withdrawn amount is subject to tax. TDS is deducted at 10% when withdrawal amounts exceed ₹50,000, and you have provided your PAN card.

If your total income is below the taxable limits, you can submit Form 15G (individuals below 60) or Form 15H (senior citizens), requesting zero TDS deduction.

Tax on EPF Withdrawal by Temporary Employee

The tax rules for EPF withdrawal are the same for all types of employees, whether they are permanent, temporary, or on contract. The taxability is determined by the length of continuous service, not the nature of employment. If a temporary employee withdraws their PF balance before completing five years of continuous service, the amount will be fully taxable, just as it would be for a permanent employee.

Tax on EPF Withdrawal from an Unrecognized EPF

If your provident fund is not recognized by the Commissioner of Income Tax, it is known as an unrecognized provident fund. Your withdrawals are taxed, irrespective of the duration of service.

The interest earned on your own contribution is taxed under the head ‘Income from Other Sources’. Furthermore, the full amount contributed by your employer and the interest earned on it are taxed under the head ‘Salaries’.

Tax on EPF Withdrawal After 5 years

If you complete five years of continuous service, the entire amount becomes tax-free. Your contribution, the employer contribution, and all interests become tax-exempt.

Table on Taxability on Withdrawal of EPF

EPF withdrawal tax treatment depends on service tenure and withdrawal reasoning. Here is the quick overview of EPF withdrawal taxability across different situations:

Rate of TDS Deduction

Knowing the rate of TDS on PF withdrawal can help you save and plan better. Let us understand:

• If your income is subject to TDS (Tax Deducted at Source), the standard rates hover at 10%, provided you share the PAN details with the payer.
• However, if you do not have a PAN, TDS rates escalate to 20% as per income tax regulations.
• If your total annual income (including TDS amounts) is below the taxable limits, you can submit Form 15G or Form 15H, preventing unnecessary deductions.

You can prevent excess TDS from diminishing income through advance planning, correct form submissions, and financial maximization strategies.

How to Avoid TDS on EPF Withdrawal?

If you want to avoid TDS on PF withdrawal, here are some useful tips:

• When you switch jobs, instead of withdrawing your EPF money, transfer it to your new employer’s EPF account. This keeps your account active and avoids unnecessary tax.

• Try to keep your EPF account untouched for at least five years of continuous service (even if it is with multiple employers). Once you complete five years, any EPF withdrawal becomes tax-free, and no TDS is applied.

• If the total amount you withdraw is less than ₹50,000, then no TDS is deducted, even if your service is under five years.

By planning your withdrawals wisely, you can keep more of your money and avoid losing a part of it to taxes!

Final Thoughts

So, is PF withdrawal taxable? It depends on your employment duration and how you manage the withdrawal. If you have completed five years of continuous service, your withdrawal is tax-free. If not, you may be subject to TDS and income tax implications.

Comprehending TDS application timing, utilizing tools like a PPF calculator, and submitting correct forms, such as Form 15G or 15H, helps minimize or eliminate unnecessary deductions.

Your Provident Fund represents years of accumulated savings and effort. Therefore, it is important to withdraw wisely and tax-efficiently. Plan ahead and follow regulations to ensure full benefit realization of your earned funds.

FAQs on Tax on PF Withdrawal