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NRIs may have to pay tax on PF withdrawal based on factors such as PF account tenure, tax regulations, and so on. Knowing about these tax implications can help you adhere to the tax laws for NRIs and stay out of legal tangles.
Being an NRI and adhering to rules and regulations for NRIs is not as simple as it sounds, especially when it comes to managing cross-border finances. A tax on PF withdrawal is one such area where most newly turned NRIs face difficulties.
If you are going through the same, you are at the right place. We have curated this blog to help you understand the taxation on NRI PF withdrawal. We will discuss all the factors affecting your PF withdrawal, along with outlining the tax treaties you must adhere to. Keep reading!
Understanding the NRI Provident Fund (PF)
Provident Fund, also referred to as an Employees’ Provident Fund (EPF) is a mandatory retirement cum future savings plan offered by eligible organisations to their employees. Once they retire, employees can use this accumulated corpus to enjoy their retirement period comfortably.
According to the PF regulations, every employee must contribute 12% of his basic monthly salary towards this fund. The employer also contributes the same amount to the PF account of his employee. Further, the accumulated amount generates interest on a yearly basis.
Upon retirement, the employees have the option to withdraw this fund entirely or partially.
In the case of NRIs, they can withdraw this amount entirely if they are leaving India permanently. The good part is they can avoid paying taxes when cashing out the PF account balance after completing five years of continuous employment in India.
However, if you leave before completing five years of employment, then you will have to pay taxes on your PF withdrawal as per your tax slab.
Tax Implications on PF Withdrawal for NRI
As discussed above, PF accounts pave an excellent way to save money for the future. Note that this amount is subject to tax implications under certain conditions. However, you can save on taxes considering the deductions under IT Act Section 80C.
Essentially, PF withdrawals fall into categories: Taxable and non-taxable PF withdrawals.
For non-resident members of EPFO (Employees’ Provident Fund Organisation), cess and surcharge will be applicable to the TDS (Tax Deducted at Source).
When your PF account is linked to a valid PAN, TDS will be 10% or the tax rate prescribed under the DTAA (Double Taxation Avoidance Agreement). The one which is more beneficial for you as a PF account holder
In essence, TDS will be applied at the rate that is applicable to the PF account holder.
Tax Implementations on NRI PF Withdrawal Before 5 Years
Cashing out your PF account balance due to any reason before completing five years of continuous service will result in a tax obligation. If you withdraw an amount above ₹50,000 before five years, you will have to pay 10% TDS.
But if you withdraw the amount post five years tenure, no TDS will be deducted from your PF account balance.
A Quick Table for Taxation on NRI PF Withdrawal
S.No. |
Scenario |
Taxability |
1. |
Withdrawal amount is less than ₹50,000 before completing 5 years of continuous employment |
No TDS. However, if you fall under the tax bracket, you have to declare the PF withdrawal in your return of income. |
2. |
Withdrawal amount is more than ₹50,000 before completing 5 years of continuous employment |
10% TDS, if PAN is linked. 30% TDS, if PAN is not provided. |
3. |
Withdrawal of PF after completing five years of continuous employment. |
No TDS. |
4. |
Transfer of PF account in case of job change. |
No TDS. |
Final Thoughts
Tax on PF withdrawal for NRI is a multifaceted concept, which is important to understand to stay on the right side of the law. As discussed in the blog, it is impacted by factors such as tax laws, duration of employment, residential status of the taxpayer, and so on.
In order to navigate the NRI PF withdrawal tax scenario successfully, it is advisable to stay informed and seek professional advice wherever possible. By doing so, you can make sure that your hard-earned income is managed and utilised wisely. Simply put, it will help you minimise your tax liabilities while improving your financial health.
Remember, knowledge and smart financial planning, along with investments like NRI life insurance, will be your best allies in the journey of becoming a successful NRI.
