Tax on EPF withdrawal is the main concern of the employee who leave early. In this post I will give you the detail information about the PF taxation rules. You will learn the tax benefits of different provident funds. I’ll also tell you the situation when you are liable to pay tax. You will also get to know the tips to avoid tax on PF. The new TDS rule is also there to pinch you, you will also learn the way to avoid TDS.
Most of the people know about the tax-free nature of EPF. The Employee provident fund is also considered most reliable retirement corpus. There is no chance of default. You will get a better interest rate and no one can take away your PF corpus. Beside this PF is totally tax exempt. We have a common perception that EPF does not have any tax tension.
But, very few of us are aware that, the PF corpus can also be subject to the ‘cut’. Your PF balance can be reduced by 34.6%. You may get only 65.5% of your PF money. Yes, it is true. The TDS (tax deducted at source) can dent your PF balance severely. There is a provision of the tax on the premature withdrawal of EPF.
We know that, during job switch, many of us try to withdraw PF balance instead of PF transfer. This tendency makes you liable to pay heavy taxes. Before learning the tax liability of PF withdrawal, let us learn the tax concession available to different provident funds.
Tax Treatment Of Different Provident Fund
There are four types of provident fund, which give tax concession. I have taken this table from the Income tax website. The table shows the tax treatment of provident funds. Please do read the note given below the table.
|Statutory Provident Fund||Recognized Provident Fund||UN-recognized Provident Fund||Public Provident Fund|
|Employer’s contribution||Exempt from tax||Exempt up to 12% of salary (Note 1)||Exempt from tax||Employer does not contribute to such fund|
|Employee’s contribution eligible for deduction u/s 80C||Yes||Yes||No||Yes|
|Interest credited to the said fund||Exempt from tax||Exempt from tax if rate of interest is upto 9.5%. Interest in excess of 9.5% is charged to tax.||Exempt from tax||Exempt from tax|
|Amount received at the time of termination of service||Exempt from tax||If certain conditions are satisfied, then lump sum amount is exempt from tax
|If certain conditions are satisfied, then lump sum amount is exempt from tax||Exempt from Tax|
- Salary for this calculation includes the following components
- Basic salary,
- Dearness allowance
- Commission based on a fixed percentage of turnover achieved by the employee.
Tax Benefit Of EPF
As you have seen in the table, the EPF enjoys many tax benefits. The EPF saves your tax in following ways
- Employer’s contribution to your EPF account is exempt from tax. This exemption is subject to 12% of your basic salary plus DA.
- The interest on employer’s contribution is also exempt from tax.
- The employee contribution toward EPF is also eligible for tax deduction under section 80C.
- The interest on the employee’s contribution is also tax exempt.
Tax Benefit Is Subject To Minimum Service Requirement
Any investment which gives tax deduction comes with a lock-in period. Except the ELSS all other tax saving investments have minimum lock in period of 5 years. So is the case with EPF. The investment in EPF may have given you the tax saving of upto 30%, it depends upon the tax slab you have been in all previous years.
Therefore, If you do not complete the minimum investment requirement of 5 years, the above tax exemption and deduction availed by you would be void. You must pay the income tax, you have saved because of the EPF contribution. It means, you need to file revised income tax return of all the previous years.
The Return Back of EPF Tax Benefit
Withdrawing EPF balance before 5 years’ service makes all of your tax saving null and void.
- You have to return back the tax deduction because of the employee EPF contribution. The employee must have taken the 80C tax benefit on the EPF contribution. It is also calculated financial year wise
- The interest on your PF contribution will become the part of other income. It would be added in the tax calculation of every financial year.
Now you can think of the hassle because of the premature EPF withdrawal. You need to file revised income tax return of all the previous years. It is really very troublesome.
Fortunately, I have left the job after completion of 5 years 🙂
Steps Of EPF Tax Calculation
The tax payment of premature EPF withdrawal is not so simple. It involves all those years when you have availed the tax benefit. To pay the tax on EPF you need to go through the following steps.
- Download the PF passbook from the UAN member portal. The EPF passbook shows the details similar to the below image.
- You have to add all the contributions separately for every financial year.
- Now Add up the employee contribution excluding interest part.
- Also Add up the employer’s contribution excluding interest.
- Add up the pension contribution.
- Pick the interest on employee contribution for a year. Deduct the interest of the previous financial year from the respective financial year. In the above case it would be 14878-12704=2174.
- Similarly also take out the interest on the employer’s contribution.
- Now open the income tax efiling portal. Choose the respective financial year to revise the income tax return.
- Increase your taxable income by the employer’s EPF contribution and earned interest of the year.
- Fill the interest on employer’s contribution into the other income column.
- Deduct the employee contribution from the total 80C investment amount. Now your 80C investment will go down.
- Repeat the above 9 steps for every financial year. Check the taxable amount before return submission.
- Pay the income tax and get the challan no. Fill the total tax paid amount and submit the revised return of every financial year.
The Pain Of TDS On EPF
The new TDS rule of PF is more painful. As it can deduct TDS upto the rate of 34.6%. It is the maximum marginal rate of income tax. The 34.6% tax is huge, that too of EPF corpus. It would be really very frustrating, if you get EPF money after such a big deduction.
Conditions of TDS on EPF Withdrawal
The EPFO can deduct tax on source (TDS) only if an employee falls under these 2 criteria.
- The employee has not completed total 5 years of continuous service.
- The EPF withdrawal amount is more than 50,000. Earlier this limit was Rs 30,000.
5 years of continuous service mean aggregate service. You may have worked in different organizations, but total service period should be more than 5 years. However, please note these points while calculating the continuous period of service.
- You must have transferred the PF balance of the previous organizations. If you have withdrawn the PF balance of previous employment, the service period of the employment is not considered for continuous service.
- Your previous service period would not be added to recent service period unless you transfer the previous PF balance.
However, you can minimize or avoid TDS on EPF withdrawal if you fulfill some requirements
Relaxation of TDS from EPF withdrawal
You have given the PAN
Normally, an employer itself submits PAN of all the employees. If an employee has given the PAN, the TDS would be 10% instead of 34.6%.
Submitted Form 15G/ 15H
If an employee submits form 15 G with the EPF withdrawal form, the TDS would not be applicable. The form 15G/15H is a self declaration that your total income (including EPF corpus) is within the tax free limit.
No TDS For Most of The Employees
Most of the employees leave the service after 5 years of service. Therefore, they need not to worry about the TDS of EPF. Please note these points.
- The EPF maturity amount is tax-free, if you are in the continuous service of more than 5 years.
- If the service termination is beyond your control. If you are out of a job because the lockout, retrenchment or medical condition, the rule of TDS would not be applicable.
REcommended: Income Tax Slab Rate of FY 2016-17
Is TDS Justified on EPF
The tax on premature withdrawal of PF is an old rule. The tax exemption on PF is subject to 5 years of service. This rule existed earlier. Now the government has added the provision of TDS.
Earlier, it is you who have the responsibility to pay tax in case of premature withdrawal. But now the government has directed the EPFO to deduct tax at source.
How Can You Avoid Tax on EPF Withdrawal
Now you are aware that early PF withdrawal can leave you in a heavy tax burden. Besides this, there are other hassles as well. But if you plan properly, you can avoid the tax and hassle both.
- Don’t try to withdraw EPF after every job hopping. You might give tax after every withdrawal. Instead, PF transfer will save you tax.
- If you are taking a small break from the job, don’t withdraw the EPF balance. You can transfer the EPF balance once you join the service. A PF account gives interest till 3 years of non-contribution.
- If you are leaving a job and switching to a business or profession. You can wait for completion of 5 years. Often, people don’t consider this fact while tendering the resignation.
How Can You Avoid TDS On Your EPF
It is not always possible to avoid tax on EPF. You may have some compulsion to leave the job before 5 years. It means you are liable to pay the tax on EPF withdrawal. But, the tax on EPF may be less than 10% amount of the EPF. While minimum TDS is 10%. Hence, you would like to defer the payment of tax. You may want to avoid the TDS. Is this possible? Yes, you can avoid TDS.
To avoid TDS you must fill the form 15G or form 15H. These forms are the declaration of non taxability. The form 15 G is widely used to avoid TDS by common public. The form 15H is used by the senior citizens.
Process of Filling Form 15G/15H
You can download the form 15G/15H and fill it. Fill and submit this form along with the EPF withdrawal application. You must mention the PAN in Form 15G/15H as well as in EPF withdrawal form. After filling this form you will get the EPF money without tax deduction at source.
Note, If the total PF balance is more than the tax free income limit of that year (2.5 lakh for FY 2015–16), you can’t avoid TDS in any case. Also, filling the form 15G does not mean, you have avoided the tax forever. You must pay the tax before filing income tax return of the financial year.
Frequently Asked Question About PF Taxation
Form 15G/15H and tax Avoidance
These are questions taken from the comment section of PF related articles on this website.
Q. I am working for a MNC for past 2.5 years. I am going to leave this organisation as I am going for Higher studies (for 2 yrs) abroad. So, Can I initiate the withdrawal process by submitting form 15G +PAN) to withdraw a PF amount without any taxation? (Link to the query)
Ans. You can withdraw PF without paying TDS by using the Form 15G. But it does not mean that your PF has become tax free. You should pay the tax according to the above procedure.
Tax After More Than 5 Years of Service
Q. I was with employer A for 4.5 years who managed PF on their own. Then I moved to employer B who manages PF through EPFO I worked with employer B for 3 years.While moving from employer A to B I got my PF transferred to EPFO. Now I am moving to USA for studies . Can I withdraw my PF without tax? Since total years I maintained is 7.5 years ( Link to the query )
Ans. Yes, you can withdraw your PF. The TDS is not applicable if your case. Neither, you are liable to pay any tax. Please refer the TDS flowchart above.
TDS on EPF Withdrawal before June 2015
Q. I worked in some MNC for 4.9 years till Dec’13, and my PF aged same tenure. After leaving my services, i applied for withdraw. I got my PF amount in Feb’2015. For this financial year April’14-March’15, I was not working anywhere. Still, my PF credited amount was lesser than actually it was in PF account as the EPF amount as 45000 and EPS as some Rs 24000. So, my query is if I had been taxed for PF, though I did not have any other income source. (Link to the query )
Ans. As per my knowledge, there should not be any tax deduction before June 2015. The TDS provision is applicable from 1st June 2015. To get a clear picture you should check the EPF passbook.
5 Year Service or 5 Years old Joining?
Q. I read from June 2016 there is some tax if you withdraw before 5 years. Is the 5 years, calculated from date of joining ? Can I withdraw it tax free even though I have not contributed for last 2 years in past 5. Since I worked for 3 years(<10 years) can I withdraw my pension scheme ? Will I get the full money (Link to the query)
Ans. You have heard right, If work for less than 5 years, your PF withdrawal would be taxable. The TDS would be applicable subject to above listed conditions. You can withdraw the pension amount as well.
Housing Loan Repayment and EPF taxation
Q. I was in the job for 18-24 months. I got a job in Australia. So i left the job and flew to Australia. I have withdrawn the amount from EPF and used it for repayment of housing loan. Will it be taxable?? Kindly let me know ( Link to the query )
Ans. Repayment of a home loan does not give any tax concession. You should pay the tax on EPF withdrawal. As you have not completed 5 years in the service.
How Much Tax Deduction
Q. I will be leaving my organization with 4 years 11 months 10 days of serving, and want to go for higher study. I want to withdraw my PF in order cover my expenses and tuition fee. How much will I get from Employee’s and Employer’s contribution? And also will I get anything from Pension Contribution? How much tax would be deducted? (Link to the query)
Ans. You are going to lose a large sum because of 20 days. The TDS would be deducted at the given rate. Please check the TDS flowchart given above for the TDS rate. Further, you need to calculate the tax on EPF according to the given method. You may be required to give some more tax. Either you may also get a refund. It depends upon your previous salary structure.
Service is less than 5 years, but PF account is very old
Q. I have left the organization in 2006 after 2 years of service and after that i joined another company and left in 2008. If I apply for withdrawal it would be taxable or not as per current PF procedures. Could you please kindly advise. ( Link to the query )
Ans. You have worked in two companies. You spent Two years each in both of the companies. Therefore, your total service period becomes 4 years. It is one year short of the 5 year limit. Therefore, your PF amount would be taxable.
The calculation of service tenure
Q. I want to withdraw my PF from my last employer, (Where I worked for 2.5 years). Now I am working with another employer for last 3.5 yrs. What will be the tax in % on the withdrawal as the a/c is more than 5 yrs old and inactive for last 3.5 yrs. Also will the tax be calculated on Principle and interest both or only interest ( Link to the query)
Ans. If you withdraw money from your first account, it would be taxable. You may get the EPF balance minus TDS. However, If you transfer the PF balance, your total service period would be more than 5 years. Thus, in future, you would be able to withdraw PF tax-free.
Q. If I changed my company from A to B and got my PF amount transferred, I work in Organization A for 6 years, had I withdrawn it would have been nontaxable, Now If I withdraw the total amount from org B in another 6 months or 1 year, whole amount would be taxable or only the amount which I received in Org B. ( Link to the query )
Ans. After the transfer of PF balance, The previous service period is added in your recent service period. Therefore, for EPFO your total service period would the total duration. The tax provision is applicable to the total service period. Since, total period would be less than 5 years, you would get EPF balance tax free.
Tax on inactive PF Account
Q. Based on what I know, the EPF account stops accumulating interest after 36 months and is marked inactive. However, you have mentioned that the amount is taxable if withdrawn before 60 months, so even if the account is inactive I cannot withdraw the money without being taxed, is that correct understanding? (Link to the query)
Ans. To get tax free EPF money, you must complete 5 years in the service. The total duration of PF account does not matter. Suppose you work for 4 years and withdraw one year after leaving the job. Thus, your PF account would be 5 years old. Still, your EPF withdrawal would be subject to tax.
The Rate of tax on EPF withdrawal
Q. How Much % is taxable if i withdraw amount before 5 years of account opening.? (Link to the query)
Ans. The tax rate on EPF withdrawal depends upon your tax slab of previous years. The employer PF contribution and interest become the part of your taxable income of every financial year. While Employee contribution is deducted from your total 80C investment. The interest on employee contribution is considered as other income.
Q. I am in job currently and have around 6L in my PF. Due to some reason, I want to withdraw (at least 80%) money from PF. Will the 30% tax be deducted in that case and I will get just 3.5L in hand 🙁 or full money I will receive? (Link to the query)
Ans. The partial withdrawal is possible subject to some strict condition. Except medical condition, minimum 5 years service is required for partial withdrawal. The amount of withdrawal depends upon the reason of withdrawal. However, this EPF withdrawal is not taxable.