Tax & TDS on EPF Withdrawal

By Akshay Sharma March 14, 2019 Finance

EPF is considered to be the most reliable retirement corpus fund which earns good interest. It came into existence with the simple objective of providing social and financial security to the working class and build a retirement corpus for them. For encouraging contribution to EPF, government has provided many tax savings benefits along with PF. Keeping in mind the objective of building a retirement fund, the government has also taken measure to discourage early withdrawal that is why a recent TDS rule allows 34.6% of TDS deduction on PF in a certain case.

Tax Benefits of EPF

EPF enjoys a lot of tax benefits in the following manner:

1. The contribution made by the employer to your EPF account, which is 12% of salary and DA is exempt from tax.

2. The contribution made by an employee under EPF is also available for deduction under section 80C of Income Tax.

3. The interest earned on the employer’s contribution under EPF is exempt from tax.

4. Similarly, the interest earned on the employee’s contribution is exempt from tax.

The tax benefits under EPF is subject to a minimum service requirement of 5 years. This means that an employee must complete the 5 years, closing the account or withdrawing the complete amount would make the deductions availed under EPF for previous years void. Thus, that person would then be required to file an updated return of all those previous years and submit the tax which has been exempted due to benefits available under EPF. The contribution made in EPF would then form part of other income.

TDS on EPF

TDS can be deducted to the rate of 34.6% on EPF on the basis that it is the maximum marginal income tax rate. This deduction happens in the following two cases:

a) the employee has not completed 5 years of service.

b) The withdrawal made by the employee is more than Rs. 50,000.

Here, 5 years of service does not mean that you have to work for this much period in the same organization, the period is calculated as total service period and it may be a combination of different organizations.

One can gain relaxation on this clause if the PAN of the employee is furnished, in such a case the TDS will be deducted @ 10%. In the normal course, it is submitted by the employer at the start itself. Also, if the employee submits the Form 15G/15H which is a self-declaration form stating that your total income is less than the minimum threshold limit for income tax purpose than there will be no TDS.

Avoid Tax on EPF Withdrawal

To avoid tax on EPF withdrawal follow these tips:

1. Opt for EPF transfer in case of job change instead of withdrawal.

2. Even in case you are taking a bit of break from the job, do not withdraw EPF money as it earns interest up to 3 years of non-contribution.

3. Also, if you are thinking to enter into business then do it after 5 years to avoid unnecessary hassle and lose.

Tax benefits on EPF encourage people to opt for it and contribute with a long term objective to build a retirement fund. The clauses related to TDS are also designed to discourage early withdrawal and view this investment as a long term asset.