EPF or employee provident fund is a mandatory contribution that you make from your salary and the same amount is contributed by your employer. This is to create a corpus for you while you are in your sunset years. While, the corpus is specifically aimed at for your retirement goals, nonetheless some of the conditions even allow premature withdrawal.
The corpus contributed towards the EPF account is allowed deduction under section 80C when arriving at gross taxable income. Also, the amount redeemed on super annuation or interest earned are tax free.
Below are given some other instances when withdrawal from EPF account attracts tax:
Case 1.Tax liability in a case when EPF money is withdrawn before 5 years of continuous service: Withdrawal of employee provident fund (EPF) that is supposedly a corpus amount aggregated for retirement attracts tax liability. The same happens in case an employee withdraws the PF amount without serving the employer for continuous 5 or more years. However, if an employee transfers the previously accumulated PF amount to the PF account held with the current employer, the previous term of service would also be accounted for while determining tax liability on withdrawal of PF.
In this case, the term of service in previous employment is considered to be part of continuous service. So, the withdrawn employee provident fund balance amount is taxable in the year of receipt as under:
1. Employer's contribution towards the EPF account and interest on it will be taxed under the head 'income from salary'.
2. Interest on your own contribution towards the EPF account will be taxed under the head 'income from other sources'.
3. Tax benefit claimed under section 80C for your contribution towards the PF account will also be taxed subject to a maximum of Rs. 1Lakh in a financial year if the same was considered to be tax exempt in the previous relevant financial years.
The rate at which tax will be charged would depend on the employee's income slab for each of the financial year in which the PF contribution was made. In addition to income tax, withdrawal of EPF amount in either of the aforesaid conditions, also requires payment of surcharge and cess as applicable for each of the years. If any tax has been deducted at the time of PF withdrawal, you need to pay the balance tax as self-assessment tax. Else, in the other case when no tax has been deducted, the entire tax amount has to be paid before filing the income tax return for the given year in which the PF amount has been withdrawn.
For instance, if you receive the PF amount in the financial year 2020, you need to discharge your tax-liability on account of the same before filing your returns for FY-2020.
Case 2: Withdrawal after 5 years of continuous service: No TDS. Also you do not need to show this withdrawal in your return of income as the withdrawal is exempt from tax.
Case 3. Transfer of EPF from one employer to another on change of job: No TDS. Also, such a transfer is not to be shown while filing the ITR as the same is not liable to be taxed.
Case 4. When withdrawal is exercised because of a reason beyond the control of employee such as ill health or closure of the company: There is no deduction of TDS. Also the withdrawal is not to be reflected in the return of income of the individual as the same is not liable to be taxed.
Case 5. Amount withdrawn is over Rs. 50,000 before 5 years of continuous service: TDS @ 10% in case PAN is provided. And in case PAN is not provided then maximum marginal tax would apply. No TDS if Form 15G/15H is furnished
Case 6. Amount withdrawn is less than Rs. 50000 before 5 years of service: No TDS. But the same has to be shown in the return of income, if the individual falls in the taxable category.