The Employees' Provident Fund Organisation (EPFO) has amended its rules to simplify partial withdrawals from provident fund accounts, giving salaried employees better flexibility to access their savings for needs such as medical emergencies, unemployment, marriage, education and housing.
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The exact amount that one can withdraw usually depends on length of service and applicable EPFO regulations. But this also raises a key concern: Do partial withdrawals hurt tax-free benefits of PF corpus.
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The interest earned from a PF corpus is generally tax-free if withdrawal is made after five years of continuous service.
What If You Make Partial Withdrawal Before 5 Years?
Employees should note that a partial withdrawal of PF does not break your 5-year service continuity rule. This means that it will not result in a tax liability as it doesn't reset your employment timeline. The 5-year rule is about continuous service and not about the balance in your account.
What If You Change Jobs?
Assuming that over five years, you work for two companies. While switching to the second company, if you transfer your PF, the timeline will generally be carried over, adding to your 5-year rule.
However, FinRight, a Mumbai based company, that resolves PF related issues, explains that your employment timeline could get reset if you withdraw your PF corpus after leaving the first job.
“Instead of transferring your PF after leaving Company A, you withdraw it. Then you start contributing to PF again when you join Company B. Those earlier 3 years are no longer carried forward into your new PF accumulation for the 5-year continuous-service test,” FinRight explained in a LinkedIn post.
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Basically, the employer's contribution and its interest are now taxed as salary. Your own contribution is not taxed again, but any Section 80C deduction claimed on it in earlier years may be reversed. This means that you need to be careful with planning advance withdrawals from PF, particularly when you change jobs.
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