EPF or Employees Provident Fund is a scheme in which the retirement benefits of a particular employee will be accumulated. This would help an employee who is working in a corporate setup prepare for his retirement with an ample amount being maintained as a balance in his or her EPF account. This fund shall be maintained by the Employees Provident Fund Organization (EPFO) and shall be regulated by the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
This covers organizations with 20 or more people employed along with certain other organizations based upon certain conditions and exemptions, even if the number of employees employed by such a company Is lower than 20. Here, the employee shall make a certain % of their salary as a contribution to the EPF, along with an equal amount of contribution which the company will make. Then, the employee shall receive a lump sum amount, including both the contributions and the interest accumulated on both the contributions during the time of his or her retirement.
Employees who are drawing monthly pay of more than INR 15,000 shall be held as a non-eligible employee for such EPF account while employees drawing a pay lower than INR 15,000 per month should mandatorily become a member of EPF.
The employees shall claim the contribution made to EPF as a deduction under section 80 c of the Income Tax Act. They can also withdraw the amount from such EPF Account as per their will, and the tax implications of the same are the basis of discussion in this article.
In case of EPF Withdrawn Before Completion of 5 Years
If an employee or EPF account holder withdraws the balance in their EPF account before the completion of 5 years of continuous service, then it shall be eligible for deduction of TDS (Tax Deducted at Source). But it is worth noting that, while computing these 5 years of service, it is not mandated that it should be under the same employer. Instead, you can transfer the balance in your existing EPF Account with the previous employer to the one with the new employer, and with this, a total of 5 years or more would be computed, which would not attract TDS.
In case of an Employee who was on Temporary for a certain part of 5 Years
Say an employee was hired on a contract basis or to a temporary role for a certain period. During this period as the employee is not on the permanent roll of employees, the employer does not hold the duty to contribute to your EPF account. But suppose after the completion of 1 year the employee was brought on the permanent roll of employees and started making contributions to the EPF Account along with the employer’s contribution.
Later, after completing 5 years of continuous service with the company, the employee resigned and withdrew the EPF account balance. This is then eligible for TDS deduction, and the employer shall deduct the same as you have not completed 5 years in your permanent role as 1 year you served as a temporary employee or staff.
In the case where the EPF is an Unrecognized One
An EPF which is not recognized by the Income Tax Act or the Commissioner of Income Tax shall be considered as an unrecognized EPF. This fund might have been approved by Commissioner of Provident Fund for availing income tax benefits on the withdrawal of EPF say like the exemption provided where withdrawals are done after 5 years, the EPF should be recognized by the Commissioner of Income Tax.
In short, we can say that if the employee is a member of an Unrecognized Provident Fund (URPF), the withdrawals made by him shall be taxed, despite the fact of competing 5 years or not.
Taxation of the Withdrawals
The EPF payout generally has 3 components, namely:
– Employees Contribution,
– Interest on Employees Contribution
– Employers’ Contribution along with interest in employers’ contribution.
Taxability of Employees’ Contribution
This is nothing but the contribution which the employee makes to the EPF on a monthly basis. And this portion that is included in your withdrawal shall not be taxed. But suppose the employee has claimed a deduction under section 80C of the Income Tax while filing ITR for any relevant year. In that case, the employee shall pay additional tax as if the 80C deduction was not claimed by him in any earlier years.
Interest Earned on Employees’ Contribution
The interest portion earned on the employee’s contribution of EPF shall be taxed under the head Income from Other Sources while filing the ITR (Income Tax Returns).
Taxability of Employers Contribution along with interest on employers’ contribution
This shall be taxable under the head Income from Salary in the employee’s tax return and the details of any TDS deducted on the same shall be reflected in your 26AS and can be claimed while paying taxes.
Rates of TDS
If the EPF Account balance is withdrawn before the completion of 5 years of continuous service, then TDS shall be deducted from the same at the rate of 10% on such balance. In the case of an employee whose PAN is not provided, such TDS deduction shall be at the rate of 30%, which is the highest income tax slab rate. However, an employee can submit form 15G/15H if the tax on your total income, including EPF withdrawal, is nil, and, in such case, TDS shall not be deducted.
Taxability on Withdrawal of EPF
| SL. NO. | IN CASE | TAXABILITY |
| 1 | The amount removed or taken from EPF is less than INR 50,000 and is prior to the completion of 5 continuous years of service. | No TDS shall be deducted. However, if the person falls under the taxable bracket, he has to offer such EPF drawings in his ITR or the return of income filed during the relevant AY. |
| 2 | The amount taken from the account is greater than INR 50,000 and is prior to the completion of 5 years of continuous service. | TDS @ 10% – if PAN is furnished; TDS @ 30% – if PAN is not furnished and No TDS in case Form 15G/15H is furnished |
| 3 | The amount taken or drawn from EPF is after 5 years of continuous service. | No TDS shall be deducted; Additionally, the individual need not offer the same in ITR or the return for income as it is exempt from being taxable or is not taxable. |
| 4 | The transfer of EPF is made from one account to another upon a change of job. | No TDS shall be deducted; Additionally, the individual need not offer the same in ITR or the return for income as it is exempt from being taxable or is not taxable. |
| 5 | Withdrawal is made before completion of 5 continuous years of service. Employment is terminated due to the employee’s ill health, the discontinuance of the employer’s business, or other reasons beyond the employee’s control. | No TDS shall be deducted; Additionally, the individual need not offer the same in the ITR or return of income as such withdrawal is not taxable or exempt from being taxed. |
So, we can now conclude that EPF is a good source of retirement benefits and, if maintained well, will help you earn a good amount of money without the need to pay tax on the contribution you make or even have TDS deducted. In addition, the employee is entitled to the contribution made by the employer.
