Tax On Pf Withdrawal

PF withdrawal can be taxed under certain circumstances and at the same time, it can be exempted under certain circumstances. There is no tax levied on the amount that is deposited and withdrawn from the

Provident Fund account. This is because Provident Fund account is categorised under Exempt on Investment, Exempted Interest and Exempt on Maturity. Though there is no tax levied on deposits and withdrawals from the Provident Fund, there are certain conditions that have to be followed. In this article, we look at the Tax On Pf Withdrawal in detail.

Types of Provident Funds

Among several types of Provident Funds, the most popular Provident Funds are

Employees Provident Fund
Public Provident Fund

Taxation Segments

Taxes levied EPF can be classified into three segments namely

Tax at the Time of Investment
Tax on Interest Earned
Tax at the Time of Withdrawal

Tax at the Time of Investment

Both the employee and the employer contrinute a part of their salary to the Provident Fund account. The taxability of both contributions is as follows:

Employer Contribution

While making a contribution, the amount contributed by the employer is tax-free if it is within the specified limit, which is 12%. If the amount contributed by the employer is more than 12%, it would be taxed under the head '

Income from Salary'.

Employee Contribution

The contribution towards PF can be claimed as a deduction under

Section 80C. The maximum deduction that is permitted under Section 80C is Rs. 1,50,000.

Tax on Interest Earned

The interest that is earned from PF at more than 9.5% rate is taxable as 'Income from Other Sources'.

Tax at the Time of Withdrawal

The amount withdrawn from an account consists of the investment/ principal portion and the interest earned on it. The taxability of the these two differs based on the time taken for withdrawal. When a withdrawal is made before 5 years of continuous service, the tax implications would be different when compared to the withdrawal that is made after 5 years of continuous service.

Five Year Withdrawal Norm

If a taxpayer wants to withdraw an amount from the PF account after 5 years of continuous service (membership of the account), then the full amount including the principal and the interest that is withdrawn would be tax-free. The interest earned from the contribution of the employers' contribution is exempted from taxation. If a taxpayer withdraws amount before 5 years, the taxability of the investment amount and the interest amount varies.

Investment Amount

The investment amount consists of the employee's contribution and the employer's contribution.

Employers' Contribution: This is the entire amount that is invested by an employer that would be taxable under the 'Income from Salary' while withdrawing the amount. Employee's Contribution: This is the amount that is invested by an employee that would be taxable as 'Income from Salary' while making the investment that is claimed has been claimed under Section 80C. If this not done, the amount would not be taxable because the taxpayer would have paid tax while making the investment.

Interest Amount

The entire interest earned from the employee's contribution and the employer's contribution is taxable under 'Income from Other Sources'. If a taxpayer withdraws before 5 years of continuous service then the entire amount that is invested and earned would be taxable under different heads of income.

Exceptions for Withdrawals If a taxpayer withdraws before 5 years of continuous service and the reason for discontinuation of service is any of the following, then it will be treated as the sum that has been withdrawn after 5 years, which would not be taxable. Here are the reasons for which exceptions can be made.

Medical Emergency
Discontinuation of Employer's Business
Reasons beyond the control of the employee

S.No.	Scenario	Taxability
1	If the amount that is withdrawn is below Rs. 50,000 before completion of 5 continuous years of service	There is no TDS applicable. However, if an individual falls under the taxable bracket, he has to offer such EPF withdrawal in his return of income.
2	If the amount that is withdrawn is more than Rs.50,000 before completion of 5 years of continuous service	TDS at a rate of 10% is applicable if PAN is furnished. However, there is no TDS if Form 15G or 15H is furnished.
3	Withdrawal of EPF after 5 years of continuous service	There is no TDS applicable. Further, there is no requirement for an individual to offer the same in the return of income as such withdrawal is exempted from tax.
4	Transfer of PF from one account to another when changing the job	There is no TDS applicable. Further, there is no requirement for an individual to 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 or of the business of the employer is discontinued or the reasons for withdrawal are beyond the employee’s control	There is no TDS applicable. Further, there is no requirement for an individual to offer the same for the return of income as such withdrawal is not liable to tax.

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Frequently Asked Questions

Common questions about Tax on PF Withdrawal: Comprehensive Analysis & Details.

The article primarily covers the tax implications for the Employees' Provident Fund (EPF) and Public Provident Fund (PPF). These are the two most popular types of Provident Funds discussed.

The employer's contribution to an EPF account is tax-free for the employee if it is within the specified limit of 12% of the employee's salary. If the employer contributes more than 12%, the excess amount is taxable as 'Income from Salary' for the employee.

Yes, an employee can claim a deduction for their contribution to the Provident Fund under Section 80C of the Income Tax Act. The maximum deduction allowed under Section 80C is Rs. 1,50,000 per financial year.

The interest earned on Provident Fund contributions is taxable as 'Income from Other Sources' if the interest rate exceeds 9.5% per annum. Interest earned at or below 9.5% is not taxable.

If an employee withdraws the Provident Fund amount after completing 5 years of continuous service, the entire withdrawal, including the principal amount and interest, is tax-free. However, if the withdrawal is made before completing 5 years of service, the tax treatment varies for the principal and interest components.

If the Provident Fund is withdrawn before completing 5 years of service, the employer's contribution to the principal amount is taxable as 'Income from Salary' for the employee. The employee's contribution to the principal amount is taxable if the employee had claimed a deduction for it under Section 80C.

If the Provident Fund is withdrawn before completing 5 years of service, the entire interest earned on both the employee's and employer's contributions is taxable as 'Income from Other Sources' for the employee.

Yes, there are exceptions to the 5-year continuous service rule. If the employee's service is terminated due to medical emergency, discontinuation of the employer's business, or reasons beyond the employee's control, the withdrawal will be treated as if it was made after 5 years of service, and the entire amount will be tax-free.

TDS at the rate of 10% is applicable if the Provident Fund withdrawal before 5 years of service exceeds Rs. 50,000, and the employee has furnished their PAN. However, TDS is not applicable if Form 15G or 15H is furnished, or if the withdrawal is made after 5 years of service or due to exceptions like medical emergency.

If an employee transfers their Provident Fund to a new account when changing jobs, there is no TDS applicable, and the employee does not need to offer the transferred amount in their return of income, as it is not a taxable event.