Tax implication on withdrawal from Employee Provident Fund (EPF)

  1. Period of service – In case the PF amount is withdrawn within 5 years of continuous service, then the lump sum amount received is taxable.

How to compute 5 years of service? To calculate the taxability of PF amount, one has to see whether the employee has completed 5 years of continuous service. But 5 years needn’t be with one employer alone. If the PF contributions from the previous employer are transferred to the existing PF account, then the period of service rendered with the former employer is also considered for calculating 5 years of service. For example, Mr. Ankith has served in Alankith Software for 2 years and prior to this, served at Avanish software for 5 years. The PF balance in Avanish Software is transferred to the new account, then the total period of service is considered as 7 years.

 

  1. Exception to 5 years of service rule: Reason of termination of service– if the reason for discontinuing the service is ill health, discontinuance of business by the employer or some reasons beyond the control of the employee, the period of service is not considered for tax computation purpose. The lump sum money received is tax exempt.

 

  1. Another exception to 5 years of service: Transfer of PF balance – If the employee transfers the balance in the existing PF account to the new PF account maintained by new employer, then it is not considered as withdrawal of EPF amount. Hence, the amount is not taxable.

 

  1. Taxability – Employer’s contribution and Interest earned thereon is taxable under the head ‘salaries’

 

  1. Taxability – Interest on Employee’s contribution is taxable under the head ‘Income from Other sources’

 

  1. Taxability – Employee contribution is taxable provided PF contribution is considered for tax benefit u/s 80C. To the extent of benefit availed, the contribution is taxable.

 

  1. Applicability of TDS – The employee will get the amount net of TDS. Form 16 will be issued towards TDS amount by the PF authorities.

 

  1. SuggestionWe suggest not withdrawing PF amount till such time you are in employment. PF is a very sound investment option which comes with good tax benefits. The interest earned on the fund, employer’s and employee contribution are all exempt from tax.

 

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About B E Kumar Prasad

B E Kumar Prasad
He is a Practicing Chartered Accountant in Bengaluru, India. He has 25+ years of experience in income tax, business setup, and NRI matters. He is also an Insolvency Professional and Registered Valuer (F&SA).Prasad welcomes your comments and questions. Please email him at [email protected]

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