The Employees' Provident Fund (EPF) is a government-backed retirement savings scheme designed to help salaried employees build a financial corpus for the future. While EPF is primarily designed to provide income after retirement, employees can withdraw funds earlier under certain circumstances such as unemployment, medical emergencies or education.
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Many employees are unaware that EPF withdrawals can attract tax depending on factors such as the length of service, the amount withdrawn and the reason for the withdrawal. Understanding these rules can help taxpayers avoid unexpected TDS deductions.
When Can You Withdraw Your EPF Balance?
Under Employees' Provident Fund Organisation (EPFO) rules, employees can withdraw their entire EPF balance upon retirement at the age of 55 years.
Those who have attained the age of 54 can withdraw up to 90% of their EPF corpus. Employees who remain unemployed for one month can withdraw up to 75% of their EPF balance, while those unemployed for two months can withdraw the entire amount.
EPF withdrawals can also be processed online without employer approval, provided the employee's Aadhaar is linked to the Universal Account Number (UAN) and the employer has approved the details.
Partial EPF Withdrawals Are Also Allowed
EPFO permits partial withdrawals for specific purposes, subject to prescribed conditions. These include medical treatment, marriage, higher education, purchase or construction of a house, repayment of a home loan and home renovation.
Understanding The Tax Treatment Of EPF Withdrawals
An EPF withdrawal consists of three components: the employee's contribution, interest earned on the employee's contribution, and the employer's contribution along with interest earned on it.
The employee's own contribution is generally not taxable at the time of withdrawal. However, the interest earned on the employee's contribution is taxed under the Income from Other Sources.
The employer's contribution and the interest earned on it are taxable. This amount is treated as salary income and must be reported under the salary head while filing an income tax return. If TDS is deducted on this component, the details will generally be reflected in the taxpayer's Form 26AS.
What Happens If You Withdraw Before Five Years?
The five-year rule plays a crucial role in determining whether an EPF withdrawal is taxable. If an employee withdraws EPF before completing five years of continuous service, the withdrawal amount generally becomes taxable. Service with a previous employer is also counted if the EPF balance has been transferred to the new employer's account.
It is important to note that a shortfall of a few days from the five-year requirement could result in the withdrawal becoming taxable.
Certain exceptions apply. Tax exemption may still be available if employment is terminated due to ill health, closure of the employer's business or circumstances beyond the employee's control.
TDS Rules On Early EPF Withdrawals
If an employee withdraws more than Rs 50,000 from EPF before completing five years of continuous service, Tax Deducted at Source (TDS) is applicable. TDS is deducted at 10% if the employee has furnished PAN details. If PAN is not provided, the TDS rate increases to 20%.
For those wanting to get tax-free benefits before five years of service, furnishing Form 15G/15H can be helpful. According to the EPFO rules, if the employee submits their PAN and also furnishes Form 15G/15H, no TDS is applicable. If the employee has submitted PAN, but fails to produce Form 15G/15H, 10% TDS is applicable.
What About Contract And Temporary Employees?
For employees who begin their careers on a temporary or contractual basis and later become permanent staff, the five-year EPF service period is generally counted from the date they join the company's permanent payroll and start receiving EPF contributions, not from their initial date of employment.
Withdrawals From Unrecognised PF Funds
Tax rules are different for unrecognised provident funds. If a provident fund is not approved by a Commissioner of Income Tax, withdrawals remain taxable regardless of whether the employee has completed five years of service.
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Tax-Free After Five Years
The good news for long-term employees is that EPF withdrawals made after completing five years of continuous service are exempt from tax.
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