How are Withdrawals from EPF Taxed?

The Employee Provident Fund (EPF) is a retirement savings scheme administered by EPFO for salaried employees. Under this scheme, both the employee and employer contribute a portion of the employee's salary to an EPF account, helping build a retirement corpus over time.

The primary purpose of EPF is to provide financial security after retirement. Upon reaching retirement age, members can withdraw their accumulated balance, which includes employee contributions, employer contributions, and interest earned over the years.

Employee contributions to EPF are eligible for tax* benefits under applicable provisions of the Income Tax Act, subject to prescribed limits. Employer contributions are also tax-exempt within specified thresholds. Additionally, interest earned on EPF is generally tax-free if the applicable conditions are satisfied. However, interest on employee contributions exceeding the prescribed annual limit may be taxable under current tax laws.

When making an EPF withdrawal, the tax implications depend on the duration of service and the withdrawal circumstances. In eligible cases, members may submit Form 15G/H to avoid the deduction of TDS.

To withdraw the EPF money, employees must submit the following document to smooth the process. These documents are:

• The first necessary document is the UAN (Universal Account Number) that the employer gives during the EPF subscription.

• The Bank account number linked with Aadhar card or PAN card.

• An identification card, such as an Aadhar card, driving licence, etc, to verify the identity of the employee.

• Further, the employee offering or releasing a letter with the date of joining and departure must be submitted to the authority.

• A valid PAN card.

Many taxpayers ask, "Is EPF withdrawal taxable?" The answer depends primarily on the employee's continuous service period. If an employee withdraws EPF after completing five continuous years of service, the withdrawal amount is generally exempt from income tax* and no TDS on EPF withdrawal is deducted.

However, if the withdrawal is made before completing five years of continuous service, the withdrawal may become taxable. In such cases, employer contributions, interest earned, and tax benefits claimed on employee contributions may be taxed according to applicable income tax provisions. EPFO may also deduct TDS if the withdrawal exceeds the prescribed threshold, and the member has not submitted the required declarations.

Therefore, understanding EPF withdrawal tax*, PF withdrawal taxability, and applicable exemptions is important before initiating a claim.

• Tax on Transferring PF from One Account to Another - If the employee transfers provident funds from one account to another at the time of job change, no TDS shall be deducted.

• Tax on Transfer to NPS - If the employee transfers their EPF amount to the NPS(National Pension Scheme) account, it is exempt from TDS deduction.

• Other Situations - If the employee is terminated due to a medical emergency before the 5 years of service. Suppose the employer's company has ceased operations, etc. For any situation that is beyond the employee's control, the TDS won't be deducted from the withdrawal of the EPF amount. The individual need not include this in their income tax returns.

The tax rates of the EPF withdrawal depend upon the situation. If the employees withdraw the EPF amount above ₹50,000 before the 5 years of service, the TDS deduction rate is 10%. A PAN card is a necessary document which needs to be mentioned at the time of withdrawal. The TDS will be deducted at 30% if the employee forgets to mention it.

Further, if the tax income, including the EPF withdrawal of the employee, is zero or nil, then he needs to submit Form 15G and Form 15H to avoid the TDS deduction.

There are the following ways where individuals can avoid TDS implications on EPF withdrawal such as:

• Suppose you don't withdraw any amount from your EPF account during the 5 continuous years of service duration. In that case, the TDS application will not be applicable on withdrawal made after 5 years of service.

• If the amount of EPF withdrawal is less than the ₹50,000 then no TDS will be applicable.

• Upon changing jobs, try not to withdraw the amount from the EPF account and transfer the fund into a new account to avoid TDS implications.

Form 15G and Form 15H are self-declaration forms that can help eligible EPF members avoid TDS on EPF withdrawal. Form 15G is generally available to eligible individuals below 60 years of age, while Form 15H is meant for eligible senior citizens.

Under current tax regulations, these forms can be submitted only when the member's estimated tax* liability for the financial year is nil, and other prescribed conditions are satisfied. It is important to note that submitting Form 15G/H only prevents TDS deduction where permitted; it does not make an otherwise taxable withdrawal tax-free.

EPFO members can submit Form 15G/H online through the EPFO portal after completing KYC requirements. Proper submission can help avoid unnecessary tax deductions and improve the EPF withdrawal process.

TDS on EPF withdrawal depends on certain factors as we have discussed above. To find out the exact tax implication of EPF withdrawal, individuals need to do the following calculations such as:

• The taxpayer needs to include the employer contribution in their taxable income.

• Further, they need to calculate the interest earned on contributions and list it in taxable income.

• Individuals must include their 80 C contributions in the past years and exclude EPF contributions.

• After knowing all that, they need to recalculate the tax obligation as per the current tax rate for the financial year. The tax rate changes, so checking it on the official website is best.

• As per the recalculation, if there is any difference in the additional tax liability, individuals must pay it.

After doing the EPF withdrawal tax calculation, individuals must pay the additional dues from past years. For that, they need to follow the following steps:

Step 1: On the NSDL Tax Payment page, select the form 280.

Step 2: Select the financial year for which you are making the payment.

Step 3: Then, you need to follow the steps to pay the remaining taxes as suggested by the portal.

Step 4: After paying the taxes, go to the assessing officer and submit a copy of the revised income tax return for the financial year.