Without doubt EPF continues to be the most loved product for the salaried. Both the employee and employer contribute to the EPF kitty; and we stand in hope of it coming to our rescue at difficult times. But when TDS is deducted on EPF balance, it comes as a harsh blow.
Let’s understand the reasons for TDS on your EPF accumulations.
EPF is withdrawn before 5 years – If you withdraw from EPF before completing 5 years of continuous service, TDS will be deducted. In calculating 5 years of service, your tenure with previous employer is also included. If you transfer your EPF balance from old employer to new employer and your total employment is 5 years or more, no TDS is deducted. Do remember that you must calculate exact 5 years, there is no grace if you are short by a few days.
Temporary employee for some part of 5 years – Say you have been hired for a temporary position or you are on contract for a certain period. During this period you are not on permanent rolls and the employer is not liable to contribute towards your EPF. After some time, you are brought on rolls and the employer begins your EPF contribution. You resign after completing 5 years. However, this period includes the months when you were not on permanent rolls and therefore the employer will deduct TDS from your EPF withdrawal, since 5 year are not complete.
Your EPF is an unrecognised EPF – A fund which is not approved by Commissioner of Income Tax, is considered an unrecognised provident fund. It may have been recognised by commissioner of provident fund or any other formal authority. But for a fund to enjoy income tax benefits of a recognised provided fund (where withdrawals are exempt after 5 years) it must be approved by a commissioner of income tax. If you are a member of URPF, your withdrawals are taxed, whether or not you have completed 5 years of service. Our tip: It helps to check with your employer about the status of your EPF.
How are withdrawals taxed?
Now that you know whether your EPF withdrawal is taxable or not, the next step is to understand how TDS is deducted and which components are taxed.
Your EPF payout has 4 components.
- Your contribution/employee’s contribution
- Interest on your/employee’s contribution
- Employers contribution
- Interest on employer’s contribution
Your contribution/Employee’s contribution – This is the amount contributed by you to your EPF. This portion of your withdrawal is not taxable. However, if you have claimed deduction under section 80C on your contribution in earlier years, you may have to pay additional tax as if 80C was not claimed by you for those years.
Interest on your/employee’s contribution – This portion is taxed as income from other sources.
Employer’s contribution and interest on employer’s contribution – Employer’s contribution and interest on it is fully taxable. It is taxed under the head salary in your tax return. When TDS is deducted on it, you are likely to see an entry under salary TDS in your Form 26AS for it.
You can claim relief under section 89(1) on these balances.
[Did you know filing Form 10E is mandatory to claim tax relief under section 89(1) – Read here]
Rates of TDS
- TDS is deducted @ 10% on EPF balance if withdrawn before 5 years of service.
- If withdrawal amount is less than Rs 50,000 no TDS is deducted.
- Remember to mention your PAN at the time of withdrawal. If PAN is not provided TDS shall be deducted at highest slab rate of 30%.
- You can submit Form 15G/Form15H if tax on your total income including EPF withdrawal is nil. TDS is not deducted if Form 15G/Form 15H is submitted. [Read more on Form 15G/Form15H here]
[Are you an employer? You can prepare TDS return on www.cleartds.com.]