Now withdrawal of EPF has become very simple and fast through an online portal. Subscribers are allowed partial early withdrawal to meet short term needs, where they can withdraw 75 per cent of the cumulative EPF corpus after leaving the job within one month, and if they stayed unemployed for more than two months then they can withdraw 100 per cent of the accumulated corpus in their EPF account. Apart from safety, EPF provides a high return as compared to other fixed options as at the time of maturity the tax is exempted. Contribution to EPF and interest received on the contribution are also exempted. But there are certain instances when EPF can become taxable. Read the below-mentioned points to get a clear picture of when the withdrawal on EPF can be taxable and points to avoid tax deduction in EPF withdrawals.
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EPF Withdrawal Before Completing 5 Years of Employment Can Become Taxable?
- If the employee made a withdrawal from EPF before completing his/her 5 years of continuous service, then tax will be deductible.
- In a case, if you have been hired on a contract basis or temporary basis for a certain period, during this period you are not on permanent rolls and the employer is not liable to contribute to your EPF. After some time you are bought on a roll and your employer starts contributing to your EPF, later on, you resign after 5 years. These 5 years includes the time when you were not on a permanent role as well and were there temporarily, so the employer will deduct TDS from your EPF withdrawal since your 5 years were not completed.
- If you have transferred your EPF balance from your old employer to new employer and total employment is of 5 years or more, then TDS will not be deducted but if it is less than 5 years or even getting short by few days, then also no grace will be granted and TDS will be deductible. While calculating 5 years of continuous service, your work period with the past employers is also included.
- There are 4 components in your EPF pay-out
- Employee’s contribution
- Employer’s contribution
- Interest on employee’s contribution
- Interest in employer’s contribution.
- Employer contribution to the EPF and the interest received from it is taxable in the income tax return of the subscriber under the category ‘Income’ if the continuous duration of employment of an employee is less than 5 years.
- If the employee made a withdrawal from the employee contribution before the completion of 5 years of continuous employment, and also if they claimed deduction under section 80C of the Income-tax Act. Then the contribution becomes taxable under the head ‘Salary’.
- In the event of withdrawal before 5 years, the interest received on the employees own contribution to the employee provident fund shall be taxed under the head of ‘Income from the other sources’
- On the withdrawal before five years of continuous employment, TDS at the rate of 10% will be imposed(if your pan number is linked with your PF account), in case your pan number is not linked with your PF account then more than 30% of TDS will be deducted.
- However, TDS will not be deductible in the case where the amount of withdrawal is less than 50,000 or employee discontinuation of service takes place due to a medical emergency / if the company shuts its operation/ any such reason which is beyond the control of the employee.
- By submitting Form 15G/15H one can avoid TDS on EPF withdrawal if their net income for that financial year is below the taxable income bracket. Form 15G is for those whose age is below 60 years and their income is below the exemption limit, and Form 15H is for seniors (60 years or above).
How to Avoid Tax Deduction in EPF Withdrawal
- When you change your job try not to withdraw from your EPF account and transfer it to your new account.
- Withdrawal of EPF after 5 years of continuous service (with all employers) will not attract TDS.
- If the withdrawal amount is less than 50,000 then no TDS is deducted.