A Very Simple Guide for Tax on EPF Withdrawals

The biggest burden on every employee is tax on EPF. People make very wrong statement about EPF, that EPF withdrawals are not taxable but it is not purely true because these withdrawals can be taxable under some conditions that are given below.

If before the completion of 5 years the employee withdraws the EPF balance then, this balance of EPF withdrawn is taxable. It is not compulsory that an employee continue its service with the one employer during his whole life. So, in case of calculating the period of 5 years of service, work done in different organisations by the employee is also considered. But the thing which is necessary is that, an employee should get the PF balance in earlier company transferred to new company PF account while enjoying the job position.

For example; Like if Mr. Rahul has worked for a period of 3 years in Garg’s Ltd and for a period of 5 years in Khana’s Ltd then he should transfer the PF balance of Garg’s Ltd to Khana’s Ltd when he is changing his job. By doing this the total period of service will be 8 years. Through this if in a case he withdraws the entire PF balance which is accumulated, then it will not be taxable.

When TDS is to be deducted on EPF withdrawal?

The TDS is deducted on withdrawal of EPF under section 192A of the IT Act, 1961. If the withdrawal of money is more than Rs.50,000 , then only the TDS will be deducted. It is applicable from the June 2016 whereas earlier the limit was very less that was only Rs.30,000. If the person provides PAN at the time of withdrawal then TDS is to deducted at 10%.  But in case the PAN is not submitted then the TDS is to be deducted at the maximum marginal rate of 34.608%.

By EPF organisation, there are some exceptions to the deduction of TDS on EPF;

  • In case of transfer of PF from one account to another account, TDS is not deducted.
  • If the employee withdraws the PF after the time period of 5years of service ,then no tax is
  • TDS is also not deducted, in case if an employee submits form 15G or form 15H because these are the forms which declare that their income will not become taxable after receiving the amount of total PF balance. The people below the age of 60 years submit the form 15G and the senior citizen of the country submit the form 15H. The PAN is to be also quoted in the Form 15G and 15H. 

Note: If the withdrawal is more than Rs.2,50,000 or Rs.3,00,000 then Form 15G and Form 15H cannot be submitted.

New rules for the EPF withdrawals are applicable from October 2016. New PF withdrawals rules has been setup or introduced by the government. So, let us give a look on the comparison of old rules and new rules.

1.        Restriction for Withdrawal

New Rule: Till the age of retirement entire EPF balance is not allowed to be withdrawn. The Pf account consists of many things like contribution made by employee, contribution made by the employer and it also includes interest earned on contribution made by employee and employer. As per the new rules the contribution of the employer and the interest earned on it is not allowed to be withdrawn till the age of retirement. Employees contribution and interest earned on it can only withdraw by the employee.

Old Rule: Earlier an employee was able to withdraw the entire EPF account even if after he leaves the job and remains unemployed for 2 or more months.

Exception of New Rule: The government provide the exception to the female employees only in case of withdrawal of the full EPF balance. They can withdraw at the time of resigning from the services  for some reasons like for getting the married or due to the child birth and also due to the pregnancy.

2.       Age of Retirement

New Rule: Now the person can withdraw up to the 90% of Pf balance on attaining the age of 57 years because of the increase in the age of retirements i.e. 58 years.

Old Rule: Earlier an individual was able to withdraw up to the 90% of the PF balance after attaining the age of 54 years because the retirement age as per PF rules was 55 years.

3.       PF Membership and Employment

New Rule: Now the employee continues to remain the member of the job because it is not allowed to withdraw the full PF balance till the age of retirement. So, the membership remains up to the time period of retirement.

Old Rule: Earlier the membership was associated with the employment as because joining to the new office will lead to the membership of the person and in case one leaves the job and withdraws the PF balance, membership to PF discontinues i.e. no membership will exist.

Our View:

As the coin has two faces head and tail, same as the changes or new rules in the PF rules has both negative and positive effects. The positive effect of the change is that, new EPF scheme ensures the financial security to the employee after the retirement and it is very beneficial for the private sector employees because they are not able to enjoy the facility of pension like government employees and the another face i.e. negative side of the change then we conclude that the one cannot withdraw entire EPF balance before retirement which means even if he/she wants or have the choice to earn the high rate of interest by business, Mutual Funds etc., they cannot do that as per the restriction imposed by the new rules.

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1 thought on “A Very Simple Guide for Tax on EPF Withdrawals

  1. I returned from abroad and subsequently worked in a company from 12th Jan 2012 to 9th Sept 2016.(4 years and 8 months).

    At the time of leaving the company I was 57 years old.

    In March 2017 I turned 58 years old.

    If I apply for withdrawal of my EPF now (1st Sept 2017), I need to know the following:

    1) Will there be any tds effected on the EPF?
    2) Will the released amount be treated as taxable income for the current financial year?

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