Income Tax on Withdrawal from Provident Funds

PF is a retirement benefit Plan introduced by the government to provide financial security to the employee for the future after his retirement. The benefit is for the organizations with up to 100 employees and whose salary is less than 15,000 per month. Mainly, there are fewtypes of Provident Fund, Public Provident Fund (PPF) which an employee can easily open by himself & Employee Provident Fund (EPF) which is opened by the Employer for Employee& some other like Recognized Provident Fund, Unrecognized Provident Fund & Statutory Provident Fund. The sight different between the both is that, in PPF only the employee deposit a share of income whereas, in Employee Provident Fund both employee & the employer deposit a share of the employee income. Further, under Section 80C the employee gets a deduction of the amount contribute to PF up to a limit of Rs. 1,50,000.

The process of withdrawal

As per the limit permitted by the government, the employee can withdraw up to his salary of three months (Basic + Dearness Allowance) or 75% of the entire amount in their PF account, whichever is less. For instance, if an employee whose salary is Rs 25,000 per month & dearness allowance is Rs 5,000 per month & and the total sum in PF Account is Rs 2,00,000. So, the employee is qualified to take withdrawal of Rs 1,50,000 i.e., 75% of the entire amount in PF amount, since it is hire than the sum of three months salary (Rs. 90,000 i.e., Rs 25,000+ Rs. 5,000 x 3 months).

Furthermore, whether the amount withdrawal by the employee is exempt or not the employee is obligatory to include the information of withdrawal in his Income Tax Return Form (ITR Form).

Below provided are certain circumstances regarding the taxability of Provident Fund.

  1. EPF is withdrawn before 5 years.

If the amount withdrawn by the employee from his PF account is more than Rs 50,000 and the amount is withdrawn before the completion of five continuous years of service then Tax will be deducted at source (TDS). The TDS will be deducted as per Section 192A (i.e., @ 10%), if the PAN is furnished. In case PAN is not furnished Section 206AA is applicable i.e., highest slab rate @ 30% plus surcharge (i.e.,34.608%). However, No TDS is deducted if self-declaration under Forms 15G & 15H are furnished. Form 15H is for senior citizens (i.e., above 60 years old) & Form 15G is for taxable income.

In case the amount is less than Rs 50,000, no TDS is applicable but if the employee falls under the bracket of tax, he has to included such withdrawal in his income. And in case, if the employee has withdrawn more than Rs 50,000 but after the completion of 5 years of continuous services then no TDS is levied. Further the employee is not liable to included such information in his Income Tax Form.

The calculation of 5 years includesthe services provided to the previous employer, if the employee transfers his EPF amount from the previous employer to the current employer.

  • Temporary Employee

For instance, an employee is on contractual or temporary basis in an organization. Since the employee is on contractual basis he is not added in the payroll and hence not eligible for PF. However, after sometimes he is considered as a permanent employee and added in the payroll, hence eligible for PF. Now, if after some time the employee wishes to withdraw from his PF account, the TDS will be liable on the withdrawal if 5 years of service is not completed excluding the time served as contractual or temporary employee and vice-a-versa.

  • Unrecognised EPF

The fund which are not approved by the Commissioner of Income Tax is called as unrecognised EPF. Hence, these funds don’t enjoy the tax saving benefits provided as per Income Tax Act. In other words, if an employee has deposits in unrecognised EPF, the withdrawal from that fund will be taxable in the hands of employee respective of any condition.

  • Termination of employment

If an employee services has been terminated or cease to end due to his ill-health or the employer discontinues his business or any other cause beyond the control of the employer, the withdrawal will be exempt in the hands of the employee.

  • On transfer

If the funds in PF fund is transferred to another account under the new employer or under any other recognized fund in the process of changing of job or employee transfer it to its NPS account, then the following transfer will be exempt from tax and the employee is not liable to disclose such information in the Income Tax Return.

Taxable Amount

  1. Employee’s Contribution

 The portion of salary which is deposited by the employee. If at the time of filling of Income Tax Return, deduction under Section 80C is availed in earlier years, the amount will be taxable at the time of withdrawal. If the deduction is not availed in earlier years, the amount will not be taxable.

  • Interest on employee’s contribution

The interest on employee’s contribution is taxable entirely in the hands of the employee under the head, income under other sources.

  • Employer’s Contribution

Employer’s contribution is entirely taxable in the hands of employee under the head, Salary.

  • Interest on employer’s contribution

The interest on employer’s contribution is taxable entirely in the hands of employee under the head, income under other sources. If the employer has already deducted TDS, it will reflect in employee’s 26AS.

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