Tax on EPF Withdrawal
India’s Employee Provident Funds (EPFs) play a crucial role in financial planning for retirees, especially for salaried individuals. Tax benefits can be obtained under certain conditions when investing in this type of vehicle. If you plan on withdrawing funds from your EPF corpus, you must understand the tax implications in order to avoid any surprises.
What is EPF ?
The Employee Provident Fund, or EPF, is a mandatory retirement fund for salaried employees earning more than Rs 15,000. Every month, 12% of the employee’s basic salary is contributed towards the EPF, and along with this, the employee also contributes 12% of the salary towards the EPF.
If you are planning to withdraw some money from your EPF but are not exactly sure about its tax implications, then you landed on the right blog. Keep reading to learn more about EPF, conditions for withdrawal, and more.
Rules for partial EPF withdrawal
Wedding
The employee can make a partial withdrawal of up to 50%, along with interest rates, in the case of their own wedding or the child’s or siblings wedding. To qualify for this type of withdrawal, the employee must have served at least 7 years of service in the organisation.
Unemployment
An employee can withdraw 75% of their EPF if they have been unemployed for more than a month. The remaining 25% can be withdrawn if unemployment continues for more than 2 months.
Medical Purposes
In case of a medical emergency involving the employee, their spouse, parents, or children, the employees are allowed to withdraw funds from the EPF contribution, or they can take six times their monthly wage from their EPF account. There is no minimum service requirement here.
Retirement
The employee can withdraw their entire PF amount upon retirement; the retirement age fixed by the EPFO (Employee Provident Fund Organisation) is 55 years. Employees can also withdraw 90% of their EPF fund one year before their retirement after reaching the age of 54.
Repayment of the Loan
If an employee has bought a home and has a loan under his name, he can withdraw 90% of his EPF funds to repay his loans.
Purchasing a new home
The employee can also withdraw money from the EPF if they want to buy a home or a plot. In the case of a plot, they can withdraw 24 months of their monthly salary, and if they want to buy a home, they can withdraw 35 months of their monthly salary. In order to be eligible to withdraw from the EPF fund under this condition, the employee must have completed at least 5 years of tenure service.
Conditions or rules for withdrawal of EPF
In order to have a better understanding of the tax implications, you need a complete understanding of the components of the EPF.
Employer contribution
The employer’s contribution to the EPF account is 12% of the employee’s basic salary and dearness allowance. However, this contribution by the employer is tax-exempt. Tax on EPF withdrawal
Employee Contribution
The contribution made by the employee is not taxable upon withdrawal up to Rs. 1.5 lakh per annum. However, they must pay tax on additional withdrawals if they have claimed a tax deduction under 80c.
Interest on the Employer's Contribution
The interest earned on employers’ EPF contributions is taxable on withdrawal.
Interest on Employee Contributions
The interest earned on employee contributions to EPF is taxable since it is classified as income from other sources by the income tax department.
Tax exemptions on EPF withdrawal
The interest earned on employee contributions to EPF is taxable since it is classified as income from other sources by the income tax department.
Tax on Transferring PF
TDS will not be deducted if an employee transfers their PF from one account to another at the time of a job change.
Tax on Transfer to NPS
The EPF is exempt from TDS deduction if the employee transfers their EPF amount to the NPS (National Pension Scheme).
Other Situations
- If an employee is terminated due to a medical emergency before completing 5 years of service,
- If the employer’s company has ceased operations, etc.
- For any situation beyond the employee’s control.
How to Avoid TDS on EPF Withdrawal
Individuals can avoid TDS implications for EPF withdrawal by following these tips:
- Don’t withdraw any amount from your EPF account during the 5 continuous years of service duration. In this case, the TDS application will not be applicable to withdrawals made after 5 years of service.
- If the amount of the EPF withdrawal is less than ₹50,000, then no TDS will be applicable.
- When changing jobs, try not to withdraw the amount from the EPF account and transfer the fund into a new account to avoid TDS implications.
TDS Rates
The tax rates on your EPF withdrawal depend on your situation. If you withdraw an EPF amount of Rs. 50,000 before you complete 5 years of service, the TDS deduction will be 10%. A PAN card should be mentioned at the time of withdrawal, and if you forget to do so, the TDS will be deducted at 30%.
Also, if the tax income, including EPF withdrawals, of an employee is zero, he will be required to submit Form 15G and Form 15H to avoid TDS deduction.
To know more about Income Tax Allowance and Deductions allowed on Salaried Individuals click here.
How to Calculate the EPF Withdrawal Tax?
To find out the exact tax implications of an EPF withdrawal, you can follow these steps:
- The taxpayer should include the employer contribution in their taxable income.
- Calculate the interest earned on contributions and list it as taxable income.
- Individuals must include their 80C contributions in the past years and exclude EPF contributions.
- Recalculate the tax obligation as per the current tax rate for the current financial year. The tax rate changes every year, so checking it on the official website is best.
- As per the recalculation, if there is any difference in the additional tax liability, individuals must pay it.
EPF is an excellent tool for long-term savings, but it is also essential to be well aware of its tax implications, especially when considering early withdrawal.
Check out the difference between PPF, EPF and VPF.
