The USP of the Employees’ Provident Fund (EPF), apart from safety and high returns (compared to other fixed income options such as PPF, FD), is that it has exempt-exempt-exempt tax status. That is, it is exempted from tax at the time of maturity. Further, contributions to EPF and the interest received on the EPF contributions are exempted from tax as well, subject to certain conditions. However, did you know that there are certain instances when EPF can become taxable?
That is right, for instance, the employer’s contribution to the EPF account can become taxable if it exceeds a certain limit in a financial year. There are few more such instances when you will have to pay tax on EPF.
Tax on Employees’ Provident Fund account :
Contribution towards an EPF account provides a benefit to individuals by way of a deduction under Section 80C. It would also be good to know what would be the income tax or TDS implications of EPF withdrawal.
The taxability on EPF can be segregated into three segments, Tax at the time of investment, Tax on interest and tax on withdrawal.
- Tax at the time of Investment
Both the employer and employee contribute a part of their salary to the provident fund account. The taxability of both these contributions is explained below.
- Employer Contribution
At the time of making a contribution the amount contributed by your employer is tax-free if it is within the limit specified, which is 12%. Any amount contributed by your employer over and above 12% is taxable in your hands as ‘Income from Salary’’.
- Employee Contribution
Your contribution towards PF can be claimed as a deduction under Section 80C. Since, the maximum deduction allowed under section 80C is Rs. 150,000, therefore that is the maximum you can contribute.
It is mandatory to contribute 12% but you can choose to contribute more, which will be deducted from your salary. However the deduction that you will get is limited upto Rs. 150,000.
- Tax on interest earned
The interest earned over and above 9.5% is taxable as ‘Income from other sources’.
- Tax at the time of withdrawal
The withdrawal amount of an account consists of the investment/principal portion and the interest earned on it. The taxability of the two differs on the basis of the time of withdrawal.
If the withdrawal is made before 5 years of continuous service, the taxability will be different as compared to if the withdrawal is made after 5 years of continuous service.
- Tax when the withdrawal is made before 5 years of continuous service
In case, where the amount is withdrawn before 5 years, the taxability of investment amount and the interest amount is different. Let’s look at it in detail.
1. Investment amount
As we have read earlier the investment amount consists of the employer’s contribution and the employee’s contribution.
i) Employers’ contribution
The entire amount invested by your employer will become taxable in your hands as ‘Income from Salary’ at the time of withdrawal.
ii) Employee’s Contribution
The amount invested by you shall become taxable as ‘Income from Salary’, if while making the investment you had claimed it as an investment deduction under section 80C. If not, then it won’t be taxable, since you would have had paid tax on it while making the investment.
2. Interest amount
The entire interest earned by you on both your (employee’s) contribution and employer’s contribution shall become taxable as ‘Income from other sources’.
Therefore, if you withdraw before 5 years of continuous service then the entire amount invested and earned becomes taxable under different heads of income.
Exception to the rule if withdrawal is made before 5 years
If a withdrawal is made before 5 years of continuous service and the reason for discontinuation of service falls in any of the of the following reasons given below then, it shall be treated as if it was withdrawn after 5 years, i.e. it shall not be taxable.
- Tax when withdrawal is made after 5 years of continuous service
If you wish to withdraw the amount in your PF account after 5 years of continuous service (membership of the account) then the entire amount including the principal and interest withdrawn by you shall be tax-free. The interest earned with respect to your contribution and your employers’ contribution is exempt from tax.
Table on taxability on withdrawal of EPF
The following table will help you easily understand the taxability on withdrawal of EPF:
| Sl No | Scenario | Taxability |
| 1 | Amount withdrawn is < Rs 50,000 before completion of 5 continuous years of service | No TDS. However, If the individual falls under the taxable bracket, he has to offer such EPF withdrawal in his return of income |
| 2 | Amount withdrawn is > Rs 50,000 before completion of 5 years of continuous service | TDS @ 10% if PAN is furnished; No TDS in case Form 15G/15H is furnished |
| 3 | Withdrawal of EPF after 5 years of continuous service | No TDS. Further, the individual need not offer the same in the return of income as such withdrawal is exempt from tax |
| 4 | Transfer of PF from one account to another upon a change of job | No TDS. Further, the individual need not offer the same in return of income as it is not taxable. |
| 5 | Before completion of 5 continuous years of service\if employment is terminated due to employee’s ill health\The business of the employer is discontinued\the reasons for withdrawal are beyond the employee’s control | No TDS. Further, the individual need not offer the same in the return of income as such withdrawal is exempt from tax |
How to avoid TDS on EPF withdrawal?
Here are a few ways of avoiding TDS on EPF withdrawal:
- When you change jobs, try not to withdraw the EPF amount and transfer it to the new account at your new company.
- If you can defer withdrawing funds from your account for five years (continuous service with all employers), withdrawals thereafter will not attract any TDS.
- If withdrawal amount is less than Rs 50,000, no TDS is deducted.