Tax rules for withdrawing Provident Fund Money due to Covid

Last year, the government allowed employees to withdraw money from their provident fund accounts if they needed cash in an emergency due to the covid-19 pandemic’s financial stress.

A member of the Employees’ Provident Fund Organisation (EPFO) may withdraw up to 75 % of his or her provident fund balance, or three months’ basic wages plus dearness allowance, whichever is less, under the provisions.

So, if your provident fund account has a balance of 1 lakh and your three months’ minimum pay and dearness allowance total Rs.45,000, you can withdraw up to Rs.45,000.

Withdrawals of this kind are usually processed within three days of receiving claims.

However, if you want to take such a withdrawal from your provident fund, you should be aware of the tax consequences.

The government has made such withdrawals tax-free in the hands of workers because they are made due to covid-related stress.

Aside from that, the EPFO allows taxpayers to withhold a portion of their earnings for various purposes such as home purchases, child education, marriage, and so on. After five years of service, these withdrawals are usually permitted and therefore tax-free. After two months of unemployment, the EPF balance can be completely withdrawn.

Read Also: Income Tax on Mutual Fund Redemption

Taxable EPF Withdrawal

Before the end of five years of continuous service, funds removed from the EPF for purposes other than covid are taxed.

“If the PF outstanding balance is withdrawn before five years of completion of service, then it is taxable under the income tax law. If the withdrawal amount is more than ₹50,000, then tax is deducted at source (TDS) at the rate of 10% under Section 192A. In case of absence of PAN, TDS will be deducted at the rate of 30%. Also, in case the withdrawal amount is less than ₹30,000, TDS deduction is not required” said  by one expert.

Aside from that, the taxpayer must include the receipt in his or her tax return (ITR). Under Section 80C, the deduction asserted against the employee’s contribution must be reversed.

“It is slightly complicated to show the receipts in the ITR in the absence of specific provision. However, one can show both the employee and employer contribution under the head ‘salary income’, while interest earned can be shown under the head ‘income from other sources’,” said by one expert. Also, remember to change your tax liability if TDS is deducted.

Withdrawals from a provident fund plan are not taxable even if they are made before the end of the five-year period under certain other exemptions applicable to workers.

“If an employee has been terminated due to ill health or the employer’s business is discontinued or the withdrawal is beyond the control of the employee… then the withdrawals are not taxable even if they are made before five years of completion of continuous employment,” said by one expert.

Read Also: Income Tax Important changes you must know

There are no tax consequences if an employee moves his or her provident fund balance from one employer to another in the event of a work shift. So, if you’re having financial difficulties as a result of covid, you can access your provident fund account.

However, experts warn against using this tool if there are other options available, as the provident fund is intended to be used for retirement savings.

Withdrawals within the first years would prevent the contributions from compounding. In addition, the provident fund is one of the few instruments that pays an 8.5 percent interest rate.

If you decide to withdraw, it’s a good idea to raise your contribution through a charitable provident fund if at all possible.


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