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Tax on Provident Fund

The Employees' Provident Fund (EPF) is a valuable long-term savings tool for retirement in India, but early withdrawals can have significant tax implications. While EPF maturity remains tax-free after 5 years of continuous service, premature withdrawals before this period can negate previously enjoyed tax benefits and trigger various tax consequences. ...Read More

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Tax on Provident Fund

Tax on provident fund: Know How it works?

Tax on provident fund
July 11, 2024

Table of Content

 

There is income tax applicable on early withdrawal from the PF, make sure you know how it works, lest you land up paying for ignorance

  • The EPF maturity amount is tax-free, if you are in the continuous service of more than five years.
  • Tax on EPF withdrawal is the main concern of the employee who leaves their jobs early and much before they actually retire.
  • You have to return back the tax deduction in case of early withdrawal from the EPF contribution.

Contributions to the employees’ provident fund or the PF qualify for tax deduction under Section 800C of the Income Tax Act. If held till retirement, this contribution can be a good retirement corpus creator and one which is tax efficient, as the PF is totally tax exempt at the time of exit. But, the tax on EPF withdrawal is the main concern of the employee who leaves their jobs early and much before they actually retire.

Many a times during a job switch, people 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. There are four types of provident fund, on which there is tax concession available;


Tax Treatment Of Different Provident Fund
 
  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* 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 up to prevalent rate. Interest in excess of the prevalent rate 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 and Commission based on a fixed percentage of turnover achieved by the employee

As seen from the above 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.

The lock-in for PF contributions to be tax free at the time of withdrawal is that the contributions must complete a minimum investment period of five years, for the above tax exemption and deduction to apply. In case of early exit, 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. Effectively, withdrawing EPF balance before five 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 and 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. Imagine the hassle of premature EPF withdrawal – you will need to file revised income tax return of all the previous years. It is really very troublesome.

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. You will have to repeat these steps for each financial year and check the taxable amount before return submission.

1. Download the PF passbook from the UAN member portal.
2. You have to add all the contributions separately for every financial year.
3. Now add up the employee contribution excluding interest part.
4. Also add up the employer’s contribution excluding interest.
5. Add up the pension contribution.
6. Pick the interest on employee contribution for a year. Deduct the interest of the previous financial year from the respective financial year.
7. Similarly also take out the interest on the employer’s contribution.
8. Now open the income tax efiling portal. Choose the respective financial year to revise the income tax return.
9. Increase your taxable income by the employer’s EPF contribution and earned interest of the year.
10. Fill the interest on employer’s contribution into the other income column.
11. Deduct the employee contribution from the total 80C investment amount. Now your 80C investment will go down.

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.

Five years of continuous service mean aggregate service. You may have worked in different organizations, but total service period should be more than five 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, depending on your case.

For instance, if you have shared your PAN, the TDS would be 10 per cent instead of 34.6 per cent. Likewise, if you have submitted Form 15G/ 15H 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. Importantly, those employees who leave the service after five years need not to worry about the TDS of EPF.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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