How are withdrawals from EPF taxed?

Tax on EPF is the major concern for every employee. Some believe EPF withdrawal are not taxable, but that is not entirely true. Withdrawal from EPF can be taxable. TDS is also deducted in some cases. Let’s find out.

If the employee withdraws the EPF balance before completing 5 yrs of service, then EPF balance is taxable.

For calculating the period of 5 yrs of service, it is not necessary that service should be continued with the same employer. He may have worked in different organisations. But whenever a person changes the job, he must get the PF balance in previous company transferred to new company PF Account.

Example: Let’s say If Mr A has worked for a period of 4 yrs in XYZ Ltd and 2 yrs in ABC Ltd .And at the time of changing the job, he has transferred the PF balance of XYZ ltd to ABC Ltd. Then the total period of service would be 6 yrs. So if he withdraws the accumulated PF balance, then it will not be taxable.

 

Cases when TDS is deducted on EPF withdrawal

TDS on EPF will be deducted, if withdrawal is more than Rs 50,000. This is applicable from June 2016.Earlier this limit was Rs 30,000.

Rate of TDS – TDS will be deducted at 10 % provided PAN is submitted. Otherwise TDS is deducted at the maximum marginal rate of 34.608 % if PAN is not submitted.

However there are certain EXCEPTIONS to the deduction of TDS on EPF by EPF organisation.

  1. TDS is deducted in case of transfer of PF from one account to another PF account
  2. Also, no tax is deducted if employee withdraws the PF after 5 yrs of period of service.
  3. In case where Form 15G or Form 15H are submitted by the employee, then TDS is not deducted. These Forms are to declare that their income would not be taxable after receiving the payment of accumulated PF balance. Form 15H is submitted by senior citizens (above 60yrs of age) and Form 15G is submitted by those who are below the age of 60 yrs.

 

                          New EPF Withdrawal Rules October 2016

The government has introduced new PF withdrawal rules. Let’s have a look at the Old v/s new rules.

  1. Withdrawal restrictions

Old Rule – If a person leaves the job and remains unemployed for 2 months or more, then he/she can withdraw the entire EPF amount.

New Rule – Full EPF withdrawal is not allowed till the age of retirement. The PF account consists of contribution made by the employer, contribution made by employee and interest earned on employer and employee contribution. Now the employer contribution and the interest earned on it cannot be withdrawn till the age of retirement. Employee can only withdraw his contribution and interest earned on it.

Exception to new rule – The exemption is given to female employees resigning from the services for getting married or due to child birth or pregnancy. They can withdraw the full EPF Balance.

  1. Retirement Age

Old Rule – The retirement age  as per PF Rules was 55 yrs .Person can withdraw up to 90% of balance on attaining the age 0f 54 yrs .

 

New Rule – The retirement age has been increased to 58 yrs. Person can withdraw up to 90% of PF balance on attaining the age of 57 yrs.

 

  1. PF Membership and employment

Old Rule –Till now membership was linked with employment .Person becomes the member    with the joining of a new job once you leave the job and withdraws the PF balance, membership cease to exist.

 

New Rule – `The membership would continue as the employee would not be able to withdraw the full PF balance till the age of retirement.

 

Our take

The changes made in the PF rules has both positive and negative effects. If we see the negative side, Person cannot withdraw full EPF balance before retirement. It means even if you have the option to earn a higher rate of interest through Business, mutual funds etc. , you cannot do that .But If we see the positive side , New EPF scheme ensures the financial security after the retirement. It is particularly beneficial to private sector employees who don’t get pension.

 

 

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