Tax on PF Withdrawal

Tax on PF Withdrawal

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 There is no tax levied on the amount that is deposited and withdrawn from the Provident Fund account.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

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The amount withdrawn from an account consists of the investment/ principal portion and the interest earned on it.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continuous service (membership of the account), then the full amount including the principal and the interest that is withdrawn would be tax-free.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.

  1. Medical Emergency
  2. Discontinuation of Employer’s Business
  3. 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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