Taxability of EPF Withdrawals

EPF i.e. Employee’s Provident Fund is a retirement fund saving scheme for salaried employees. 12% of the employee’s basic salary is contributed to the EPF account on a monthly basis by the employer. Even employee has an option to make self-contribution to this fund. Both employees and employers contribute to the EPF, and it serves as a retirement savings plan for employees. EPF contributions serves as an important tool for retirement savings, current tax savings and tax free interest and maturity.

There are certain instances where TDS provisions apply on EPF withdrawals and there are certain instances where such withdrawal is exempt from tax. Let us understand this in brief.

Who can withdraw complete EPF?

Any person in employment who wishes to withdraw EPF entirely from their EPF fund has to complete certain conditions which are as follows:

• The entire EPF amount can be withdrawn upon retirement which is the age fixed by the EPFO i.e. 55 years or at the time of actual retirement whichever is later.
• 90% of EPF can be withdrawn one year prior to retirement.
• 75% of the EPF amount can be withdrawn after one month of unemployment. The remaining balance in PF will be transferred to the PF account of the new company.
• Entire EPF amount can be withdrawn after two months of unemployment.
• UAN is required for withdrawing EPF.

However, EPF can also be withdrawn partially for specific purposes like medical emergency, marriage, education, purchasing or constructing or renovating property or repaying the outstanding property loan.

TDS and Taxability Provisions on EPF withdrawals:

EPF withdrawal can be done for following 3 cases:

• Employee’s contribution
• Interest on employee’s contribution
• Employer’s contribution or interest on employer’s contribution

Section 192A of the Income Tax Act states that TDS would be deducted from EPF withdrawals under the following situations:

• The employee withdraws more than INR 50,000
• The employee has not completed 5 years of continuous service

However, there will be no TDS if the employee has completed 5 years of continuous service and withdraws more than Rs.50,000. The TDS applicability is there when the employee has not completed 5 years of continuous service and withdraws more than Rs.50,000.

Tax applicability

Employee’s contribution:

This portion of EPF withdrawal is not taxable. However, if employee has claimed deduction under section 80C on his contribution in earlier years, he may have to pay additional tax. This simply means that the employee has benefited already in previous years from EPF deduction under 80C, so upon withdrawal he will be liable to pay additional tax. If he had not claimed 80C deduction in previous years then the entire EPF withdrawal would be tax free.

Interest on employee’s contribution:

This is taxable under the head “income from other sources”.

Employer’s contribution and interest on employer’s contribution:

Both of these are taxable under the head “income from salary” in the employee’s hands.

All these above mentioned provisions are applicable when the EPF is a recognised provident fund. No exemption from taxation or TDS provisions will be given if the withdrawals are made from an unrecognised provident fund. A fund which is not approved by the “Commissioner of Income Tax” is considered an unrecognised provident fund.

Rate of TDS on EPF Withdrawals:

If the amount withdrawn is > Rs 50,000 and before completion of 5 years of continuous service, then TDS will be applicable @10% if PAN is furnished. If the employee does not furnish the PAN then TDS would be applicable @20% as per Budget 2023(earlier the rate was 30%).

TDS will not be applicable if the employee submits form 15G or 15H. Form 15G is meant for resident individuals and HUF’s who do not have a taxable income. Form 15H is for senior citizens aged 60 years and above stating that their income from all sources is within the exempted limit.

EPF Withdrawal before completing 5 years of continuous service:

As discussed earlier TDS provisions are applied on EPF withdrawal of more than Rs.50,000 and where 5 years of continuous service is not completed. For calculating tenure of 5 years of continuous service, the period served under old employer will also be considered.

However, the withdrawal is exempt from tax when an employee withdraws the EPF after 5 years of continuous service.

The period of temporary employment is not considered in calculating the completed continuous years of service. Even though the employee has worked for 5 years or more but if some years were spent in temporary employment, those years would be excluded from calculation.

Conclusion:
EPF withdrawals can be made partially in case of certain financial requirements, otherwise the same is paid to employee upon retirement. Taxability defers upon certain conditions like partial or complete withdrawal, amount of EPF withdrawn before 5 years of continuous service, provident fund being recognised or urecognised etc. If an employee wishes to save tax on EPF withdrawals he has to consider such facts like TDS applicability, employee’s or employer’s contribution etc.

About Author:

CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.