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Are EPF Withdrawals Tax-free?

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Highlights

  • Withdrawals from your provident fund account before 5 years can attract tax
  • But that is subject to change under certain circumstances, read this post to know the same!

Employees Provident Fund (EPF) is one of the most popular tools to accumulate retirement corpus. People with a low-risk appetite find it good investing in this product. The contribution to the provident fund is made by both you and your employer. The employer deducts 12% of your basic salary and dearness allowance every month and deposits it in your EPF account. It is marked as an employee contribution to the provident fund. The employer also contributes the same 12% of basic salary and dearness allowance from its side to your EPF account. Around 8.33% of its contributions go into the employer’s pension scheme by default and the rest remains with the EPF account.

Contributions accumulate month on month to become a large surplus over time. But you may face a situation when you have to withdraw from it to fulfill certain needs. Keeping this in mind, the retirement body Employees Provident Fund Organization (EPFO) allows provident fund withdrawals even before you retire. But the EPF withdrawal is restricted to certain purposes such as marriage and education of children, home purchase, medical treatment, etc. But will the withdrawal from your EPF account attract tax? If Yes, what are the tax norms on provident fund withdrawals? Read this post further to know the same.

Income Tax Norms on Provident Fund Withdrawals

Employees contribution excluding interest is not taxable. You can even claim tax deductions from your income under Section 80CCC of the Income Tax Act. The interest earned on the same is, however, taxable under the head ‘Income from Other Sources. Employer’s contributions and interest on the same are taxable. But the imposition of Tax Deducted at Source (TDS) on both employee and employer contributions will depend on the time when you withdraw from your provident fund account.

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TDS applies to employees provident fund withdrawals made before completing 5 years of continuous service. The calculation of continuous service will include the time for which you were with the previous employer/s. However, if you withdraw less than INR 50,000, no TDS will apply. However, If the income of the individual post eligible tax exemptions & deductions falls within the tax bracket, he/she needs to show such withdrawal in his/her return of income. If the withdrawal exceeds INR 50,000 before 5 years of continuous service, 10% TDS will apply if PAN is registered. The TDS rate will go up to 30% in the absence of PAN. However, there will be no TDS in this case if the individual submits the Form 15G/15H. Also, if the employee is terminated from his/her job due to illness or the closure of the organization, there shall be no TDS even if you don’t complete 5 years of service at that time.

Provident fund withdrawals after 5 years of continuous service won’t attract TDS. Even if you transfer the EPF account balance of the previous employer to the new employer on switching the job, the TDS won’t apply if you have worked for 5 years, including the tenure of all your previous organizations, continuously.

What is NPS All About?

The National Pension System (NPS) is a voluntary retirement savings scheme. Like in EPF, both you and your employer can contribute to an NPS account. NPS investments are riskier than the investments made in the EPF as upto 50% of the contributions made in the former goes into equities. Default contributions to NPS come under the tier-1 account. Whereas, voluntary additions come under the tier-II account.

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You are allowed to withdraw upto 25% of the corpus if the investment in NPS is made for at least 3 years. However, provident fund withdrawals are allowed for specific purposes such as marriage and higher studies of your children, home purchase/construction, and medical treatment of self and family members. You can withdraw a maximum of 3 times in the entire tenure having a gap of 5 years. Such restrictions on withdrawals apply to tier-I accounts only. These won’t be the case for tier-II accounts.

And if you believe you can withdraw the entire surplus invested in NPS after retirement, you are in a myth! You can withdraw upto 60% of the NPS corpus. The good thing is that you can withdraw the said proportion without any TDS. The remaining 40% will be invested to buy an annuity scheme offering you regular pension post retirement.

Tax Exemptions to Have on NPS Contributions

Tax exemptions on your contribution to NPS will be available under Section 80CCD(1), a sub-part of 80C. You can claim as much as 10% of your salary. However, self-employed people can get upto 20% of their gross income. Section 80CCD(2) is about an employer’s contribution to NPS. This does not form a part of 80C and is not available for the self-employed segment. You can claim the lowest of the following three as a tax benefit.

  • The exact contribution made by the employer to NPS
  • 10% of your basic salary and dearness allowance
  • Gross Total Income

Overall, the maximum exemption limit is capped to INR 2 lakh.

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