For most salaried people the provident fund contribution constitute a major chunk of their tax savings under Section 80C of the Income Tax Act. But, there are few instances, when this long-standing and still preferred retirement contribution instrument levies income tax on members.
Early withdrawal:
When the EPF balance is withdrawn before completion of five years of continuous service, TDS is deducted on the withdrawal. The way to calculate five years of service, the employment with previous employers is also included and considered. What this means is that if you transfer your EPF balance from past employers to the most current employer and your total employment this way is five years or more, no TDS is deducted. Do remember that you must calculate exact five years; there is no grace if you are short by even a few days.
Temporary positions: In case you have been hired for a temporary position or have a contracted employment and you are not on permanent rolls and the employer is not liable to contribute towards your EPF. After some time, you are brought on rolls and the employer starts deducting and contributing towards your EPF contribution. Now, you may resign after years of working for such an organisation, however, you may not have been a regular for all this time. In such cases, the employer will deduct TDS from your EPF withdrawal, because you have not completed the full five years on their rolls with PF contributions.
Unrecognised EPF: There are times when you may be contributing to a PF, but the fund may not have been approved by the Commissioner of Income Tax, and is considered an unrecognised provident fund. A fund to enjoy income tax benefits of a recognised provided fund must be approved by a commissioner of income tax. If you are a member of unrecognised provident fund, your withdrawals are taxed, whether or not you have completed 5 years of service. Our tip: It helps to check with your employer about the status of your EPF.
How EPF withdrawals are taxed?
To understand this, you need to understand the four components of the EPF – both your and the employer’s contributions and also the interest earned on both your and the employer’s contributions.
Your contributions: This portion of your withdrawal is not taxable. However, if you have claimed deduction under section 80C on your contribution in earlier years, you may have to pay additional tax as if 80C was not claimed by you for those years.
Interest on your contribution: This portion is taxed as income from other sources.
Employer’s contribution and interest on this contribution: The employer’s contribution and interest on it is fully taxable. It is taxed under the head salary in your tax return. When TDS is deducted on it, you are likely to see an entry under salary TDS in your Form 26AS for it.
You can claim relief under section 89(1) on these balances.
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Applicable TDS Rates
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- TDS is deducted @ 10% on EPF balance if withdrawn before 5 years of service
- If withdrawal amount is less than Rs 50,000 no TDS is deducted
- Remember to mention your PAN at the time of withdrawal. If PAN is not provided TDS shall be deducted at highest slab rate of 30%
- You can submit Form 15G/Form15H if tax on your total income including EPF withdrawal is nil. TDS is not deducted if Form 15G/Form 15H is submitted
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