Tax Implications on PF Withdrawal: A Complete Guide

EPF is a welfare policy that has been put into practice under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 to improve and secure your future as an employee. You can get your EPF proceeds when you retire or leave the employment, given that specific criteria are met. Your employer also makes a contribution to your EPF. The accumulated interest is then credited to your PF account.

If pass away before redeeming your EPF, your dependents are entitled to the benefit.

EPF is very important after retirement, as it provides a sense of security that is otherwise very hard to find. The accumulated amount of EPF after retirement plays an important role in bringing a sense of financial security, which is otherwise, without any retirement fund, difficult to achieve for a salaried person.

Moreover, EPFs are liquid, which means you can withdraw a portion from your EPF, in case of an emergency. This is a government-backed scheme that ensures overall safety and security.

The taxability of EPF withdrawal depends on the years of service observed by the employee and how. If the employee has served 5 years continuously, then the amount withdrawn from their EPF account will not be taxed. Therefore, if you, as a salaried employee eligible for EPF contributions, make EPF withdrawals before completing 5 years of continuous service, the same will be taxed.

Your contribution, which is the principal amount, is taxable under the individual’s income slab, whereas the employer’s contribution, which includes principal and interest earned, is taxed as income from salary. The interest on your contribution is taxed as income from other sources.

10% TDS on EPF withdrawal, before 5 years of continuous service, is deducted if the withdrawal exceeds ₹50,000 (if PAN is provided). Without PAN, TDS rate is 20%. Additionally, if one withdraws more than Rs 50,000 before the 5-year service requirement but they submit Form 15G (or 15H for senior citizens), TDS will not be deducted.

EPF withdrawals are tax-free in the following circumstances:

• 1) If the withdrawal happens after five continuous years of employment.
• 2) If the withdrawal was because of unavoidable reasons like ill health and business discontinuity.
• 3) Withdrawals for home purchases, education, or marriage are typically tax-free; they are subject to Employee Provident Fund Organisation rules.
• 4)When an employee withdraws the sum at retirement.

That said, if the PF is transferred to a new account due to a job change, this again will not lure any taxes.

The taxation of premature EPF withdrawal is not that simple. Follow the following steps:

• Download the PF passbook from the UAN member portal, and then add the contributions separately for every financial year.
• Now add your and your employer’s contribution, excluding the interest part. Then, add pension contributions.
• Add the yearly interest on your contribution. Deduct the interest of the previous financial year from the respective financial year. Do the same thing for the employer's contribution.
• Now open the income tax e-filing portal and choose the financial year.
• The next thing to do is to increase your taxable income by the employer’s EPF contribution and the earned interest of the year.
• Fill the interest on the employer's contribution into the other income column.
• Deduct the employee contribution from the total 80C investment amount.

As mentioned in the Section 192A of the Income Tax Act, 1961, withdrawing prematurely from one’s EPF accounts to TDS application. This is done to encourage savings and help participants of the EPF built their retirement corpus.

However, in times of need, individuals can withdraw prematurely from their PF account on which 10% TDS is applied (20% if PAN is not submitted). This is applicable if the withdrawn amount is more than Rs 50,000. That said, if you submit Form 15G (15H for senior citizens) stating that your annual income is below the taxable limit, you will successfully be able to avoid TDS on EPF withdrawal prematurely.

Again, if you are switching jobs, instead of withdrawing from your existing account, opt for a transfer in the new account. This will not cause a break in your years of service and you will not be charged with TDS. All said, if you have completed 5 continuous years of service, EPF withdrawal shall not attract TDS.

Your contribution to the fund has a positive impact on your taxable income. Your annual contribution of up to Rs. 1.5 Lakh to the PF is eligible for tax deduction under Section 80C of the Income Tax Act, 1961. This also applies to Voluntary Provident Fund (VPF) contributions made during the financial year. However, do keep in mind that this deduction u/s 80C is applicable only if one has opted for the old tax regime. The tax deduction benefit does not apply to individuals opting for the new tax regime.

Filing tax returns for EPF is not complicated. If your EPF withdrawal amount is taxable, the amount can be taxed under specific income tax slabs.

Step 1: First, gather Form 16/16A issued by your employer or EPFO.

Step 2: Collect your bank statements for withdrawals. Now, log in to the tax portal and use your PAN to log in.

Step 3: Report the EPF withdrawal under the "Income from Other Sources" section in your ITR.

Step 4: Reduce any TDS already applied by EPFO from your overall tax liability.

Step 5: Finally, submit your ITR form with the correct details.

One thing to remember: if TDS wasn’t deducted, you must pay any remaining tax liability before filing.