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How are Withdrawals from EPF Taxed?

EPF withdrawal is common from employees during the emergency or after the service period. However there are certain situations where tax on epf withdrawal is applicable.

Employee provident fund or EPF is the scheme offered by the EPFO (Employees' Provident Fund Organisation) to salaried individuals. It is a retirement plan for salaried employees. This saving scheme offers various benefits to salaried employees, such as financial security, tax deductions, etc.
 

However, most individuals are worried about the tax implications of EPF withdrawal. There are certain conditions where EPF withdrawal can be taxed and situations where EPF withdrawal is exempted from taxation.

In this blog, we will learn about EPF withdrawal taxability in detail.

What is an Employee Provident Fund?

EPF is a saving scheme program created for salaried employees under the Miscellaneous Act of 1952. There are four contributions to EPF accounts: the employer's contribution, the employee's contribution, the interest earned on the employer's contribution and the interest earned on the employee's contribution.

Under the scheme, the employee and employer contribute 12% of the basic salary to the EPF account. At the end of service tenure, the employee receives a lump sum amount accounting for all four components of EPF contribution.
 

The plan aims to provide financial security to the employees in the form of a lump sum amount at the time of retirement from their jobs.
 

However, employees can withdraw money from EPF accounts during their service period, too, but there are tax implications for it.


What are Various EPF Withdrawal Rules?

The EPF is a terrific saving scheme that encourages employees to save money for retirement. However, it is entirely rational for employees to make partial withdrawals of EPF amounts under certain situations. These conditions are:
 

  • Wedding - The employee can make a partial withdrawal in case of their own, child's, and sibling's weddings. In that case, the employee can take 50% of the employee's contribution along with interest. However, to qualify for this kind of withdrawal, he /she must have completed 7 years of service in the organisation.
  • Unemployment - Another EPF withdrawal condition is unemployment. If the subscriber of the EPF fund has been unemployed for more than a month, then he/ she can take out 75% of the EPF fund. The remaining 25% of EPF funds can be further withdrawn from employees if the unemployment lasts for more than 2 months.
  • Medical Needs - In a medical emergency, the employee can either take relief from the EPF contribution or six times the monthly wage can be taken out from the EPF account to pay for medical bills. The EPF benefits can be taken in case of a medical emergency of employee himself, their spouse, children, or parents. In this kind of emergency, there is no service tenure requirement.
  • Retirement - This is the ideal EPF withdrawal situation where employees can withdraw from the EPF amount when he is 58. The employee is allowed to take 90% of the EPF fund.
  • Loan Repayment - Another situation where an employee can take out an amount from the EPF fund is for loan repayment. If the employee has bought the property and has a loan under his name, he can take 90% of the funds to pay the loan amount.
  • Home Renovation - If the employee wants to renovate the house registered under his name or spouse, he can withdraw money from the EPF account. In such a situation, the employee can withdraw 12 times their monthly salary. However, they must complete the 5 years of service tenure to be eligible.
  • Purchasing New Home -Lastly, if an employee wants to purchase a new home or property, they can withdraw money from the EPF fund. The property must be registered under their name or jointly with their spouse. For the purchase of a plot, the employee can withdraw 24 times their monthly salary; for a home purchase, they can withdraw up to 36 times their monthly salary. To be eligible for the EPF withdrawal, the employee must complete 5 years of service tenure.


Documents Needed for EPF Withdrawal

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.


Income Tax on EPF Withdrawal

To understand the tax implications of EPF withdrawal, you need to understand the EPF components. These components are:
 

  • Employer contribution - The employer's contribution to the EPF account is 12% of the employee's basic salary and dearness allowance. However, this contribution by the employer is tax-exempt. The contribution above this is taxable and can be seen as the head salary under the tax return.
  • Employee Contribution - This is the contribution made by the employee to their EPF account. This portion of income is not taxable upon withdrawal up to ₹1.5 lakh per annum. However, if the employee has claimed the tax deduction under section 80C, they must pay additional tax upon withdrawal.
  • Interest on Employer's Contribution - The interest employees earn on the employer's contribution to the EPF account is also taxable upon withdrawal as per the rules.
  • Interest on Employee Contribution - This is the portion of EPF where interest is generated on the contribution made by the employee, and it is taxable as it is categorised by the income from other sources by the income tax department.


Various EPF Withdrawal Taxability Situations

Let's understand in detail about various taxability of PF withdrawal situations:
 

  • Tax on EPF Withdrawal After 5 Years of Continuous Service - If the employee wants to withdraw the amount from the EPF account after 5 years of continuous service, the withdrawal amount is tax-free. However, If the employee is the taxpayer, he must disclose the EPF withdrawal when filing income tax returns.
  • Tax Implications on EPF withdrawals Before 5 Years - If the employee wishes to withdraw an amount from the EPF account before the 5-year service period. Then, TDS ( tax deducted at source) would be deducted from the amount if it is more than ₹50,000. No TDS will be deducted on the amount below ₹50,000. In the 5-year service tenure period, the service period from the previous employees will also be included.
  • Tax on EPF Withdrawal from unrecognised EPF - An unrecognised EPF is the fund started by the organisation or employee and not recognised by the Commissioner of Income Tax. However, these schemes follow all the rules and regulations of EPFO. Since the income tax department does not approve these schemes, they are liable for tax implications.
  • Tax on EPF Withdrawal Post-Retirement - The amount withdrawn from the EPF account after the 5 years of continuous service is tax-free. So if the employee withdraws the amount after retirement, they need to pay taxes on the interest earned on the EPF amount as it is cited as income from other sources by the authorities.
  • Tax on EPF withdrawal by Contract Basis Employee - For the employee hired for a contractual or temporary job role, the employer need not contribute to the EPF account. However, if he does and the employee resigns before the 5 years of service, the TDS will be deducted on withdrawal.

Various EPF Withdrawal Tax Exempt Situations

 

  • 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.

TDS Rates

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.

Ways to Avoid TDS on EPF Withdrawal

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.

How to Calculate the EPF Withdrawal Tax?

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.

Steps to Pay EPF Withdrawal Taxes

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.

Conclusion

EPF is a lucrative saving scheme that offers financial security to salaried individuals when completing their jobs. Further, employees can also make partial withdrawals from their EPF account. However, tax on EPF withdrawal is deducted under Section 192A of the Income Tax Act, 1961, at the time of payment.

If the individual wants to benefit from the exemption from TDS on EPF withdrawal, they must submit the necessary forms to avoid deductions. Further, paying the taxes on EPF withdrawal is applicable if you fall in the category of paying taxes.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

Is PAN mandatory for PF withdrawal more than ₹50,000?

If you provide the PAN card information during EPF withdrawal, the TDS rate is 10% of the amount withdrawn. If you haven't submitted the PAN card, it is applicable at a rate of 30% of withdrawal. However, below ₹50,000, no TDS is deducted from the EPF withdrawal amount.

Which tax form for PF withdrawal?

If your taxable income is zero or nil, you must submit the Form 15G and Form 15H.

Is earning interest on an EPF account after leaving the job possible?

If you leave or resign from the job before 58 years and don't wish to join any other organisation, the EPF account will become inoperative. If you don't apply for EPF withdrawal within 36 months then in that case, you won't earn any interest on the EPF amount.

Disclaimers

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not guaranteed issuance plans, and they will be subject to the Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions, please read the sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and does not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication. However, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • Tax:* Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.