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Income Tax on EPF Withdrawal of Resident Indians

Key Budget Update: For cases where PAN is not provided, the TDS rate on the taxable portion of EPF withdrawals has been reduced from 30% to 20% in the 2023 budget.

The Employees' Provident Fund (EPF) is a retirement savings scheme designed for salaried individuals. Both employees and employers contribute 12% of the employee's basic salary to this fund monthly. Contributions to EPF are eligible for tax deductions under Section 80C. Employees can also voluntarily contribute more than the mandatory amount, termed as the Voluntary Provident Fund (VPF).

Understanding the tax or TDS implications of EPF withdrawals is crucial for financial planning.

Updates on Provident Fund

The Employees' Provident Fund Organisation (EPFO) offers an annual interest rate of 8.25% for the financial years 2023-24 and 2024-25.

EPF withdrawals can either be taxable or tax-exempt depending on certain conditions.

Eligibility for EPF Withdrawal

To withdraw the entire EPF balance, the following conditions must be met:

  1. Retirement: Employees can withdraw the full EPF balance upon retirement at the age of 55.
  2. Pre-Retirement: Up to 90% of the EPF balance can be withdrawn one year before retirement, once the employee reaches 54 years.
  3. Unemployment:
    • 75% of the EPF balance can be withdrawn after one month of unemployment.
    • The remaining amount will be transferred to a new account upon re-employment.
    • Complete withdrawal is allowed after two months of unemployment.
  4. Without Employer Consent: Employees can withdraw EPF without employer consent by applying online, provided the Aadhaar is linked to the Universal Account Number (UAN) and employer approval is obtained.

Partial Withdrawal Conditions

Partial withdrawals are permitted for specific purposes upon meeting certain criteria:

  • Medical emergencies
  • Marriage
  • Education
  • Purchase of land or construction of a house
  • Repayment of a home loan
  • House renovations

Tax Implications on EPF Withdrawals

EPF payouts are categorized into three components:

  1. Employee Contribution: This amount is exempt from tax unless a deduction under Section 80C was claimed earlier. In such cases, the deduction will be reversed for the relevant years.
  2. Interest on Employee Contribution: Taxable under “Income from Other Sources.”
  3. Employer Contribution and Interest: Fully taxable under the “Salary” head. TDS is deducted on this amount and reflected in Form 26AS.

Tax on Withdrawals Before 5 Years

If EPF is withdrawn before completing five years of continuous service:

  • TDS is deducted if the withdrawal amount exceeds ₹50,000.
  • No TDS is deducted for amounts below ₹50,000.
  • The total service duration, including previous employers (if EPF is transferred), is considered for calculating the five years.

Tax Implications for Temporary Employees

Temporary employees become eligible for EPF contributions only after being added to the permanent payroll. If such an employee withdraws EPF before completing five years as a permanent employee, the withdrawal will be taxed accordingly.

Unrecognized Provident Fund Withdrawals

Withdrawals from unrecognized provident funds, which are not approved by the Commissioner of Income Tax, are taxable irrespective of the service duration.

Withdrawals After 5 Years

Withdrawals made after five years of continuous service are exempt from tax.

TDS Rates

  • TDS is deducted at 10% for withdrawals exceeding ₹50,000 if service is less than five years, provided PAN is submitted.
  • If PAN is not submitted, TDS is deducted at 20%.
  • No TDS is deducted if Form 15G or 15H is submitted and the individual’s total income is below the taxable limit.

Taxability Scenarios

Scenario

Taxability

Withdrawal below ₹50,000 before 5 years

No TDS, but taxable if income exceeds the threshold.

Withdrawal above ₹50,000 before 5 years

TDS @ 10% with PAN; No TDS with Form 15G/15H.

Withdrawal after 5 years

Exempt from tax and TDS.

Transfer of PF to a new account

Exempt from tax and TDS.

Withdrawal due to uncontrollable circumstances (e.g., illness, employer business closure)

Exempt from tax and TDS.

Avoiding TDS on EPF Withdrawals

To avoid TDS, consider the following:

  • Transfer the EPF balance when switching jobs instead of withdrawing.
  • Avoid withdrawals until completing five years of continuous service.
  • Withdraw amounts below ₹50,000, as no TDS applies.

Conclusion

Understanding the taxation rules surrounding EPF withdrawals ensures better financial planning and tax efficiency. By adhering to the guidelines and making informed decisions, individuals can maximize their savings while minimizing tax liabilities.

If you have any further questions or need assistance, feel free to reach out to us at admin@ushmaassociates.com or info@nricaservices.com, or contact us via call/WhatsApp at +91 9910075924. 

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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.

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