EPF withdrawal before 5 years: Know when your PF money attracts tax

New Delhi: The Employees' Provident Fund (EPF) is a government-backed, long-term investment tool for employees' post-retirement life. It comprises contributions of 12 per cent of the basic salary each from the employer and the employee. However, of the employer's 12 per cent contribution, 8.33 per cent goes to the Employees' Pension Scheme (EPS). The funds in the EPF account earn interest at rates prescribed by the government.

Though EPF is meant for long-term investment to provide support after retirement, an employee may choose to withdraw the amount earlier in certain cases. These funds may enjoy tax benefits; however, withdrawal is not always entirely tax-free. The taxability of PF depends on the duration of service, fund size, and contributions. TDS deductions may also apply.

Before applying for withdrawal, the employee must check the tax liability, which depends primarily on the years of continuous service. Under Section 10(12) of the Income-tax Act, the entire amount, including the employer's contribution, the employee's contribution, and the interest earned, is tax-free if the employee has completed five continuous years of service.

Five continuous years of service does not imply that an employee must be associated with one employer throughout the period. Even if the employee changes jobs and the account is transferred from one establishment to another within five years, the service would be considered continuous.

Tax implications apply when the withdrawal is made before the completion of five years of continuous service. As per the provisions of the Income-tax Act, PF withdrawal is taxed under the head "salary", and taxability varies by component.

The law, however, provides exemptions in certain cases, and the employee may also claim tax deductions where applicable.

Withdrawals made under certain conditions enjoy tax benefits:

• The employee's poor health condition
• Closure or discontinuation of the employer's business
• Circumstances beyond the employee's control

If the employee has not yet completed five years of service but qualifies under one of the mentioned conditions, TDS would not be deducted. TDS exemption will also apply if the withdrawn amount is less than Rs 50,000.

TDS implications

No TDS applies to the amount withdrawn, including the interest, after five years of continuous service.

No TDS applies if the amount withdrawn is less than Rs 50,000 and the employee has yet to complete five continuous years of service.

TDS is deducted at 10 per cent if the amount withdrawn is Rs 50,000 or more, PAN details are furnished, and the employee has not completed five continuous years of service. TDS applies at a higher rate if PAN details are not available.

Partial withdrawals for specified purposes, such as education, housing, and marriage, are governed by different provisions.

Employees with nil tax liability should submit Form 121 to avoid TDS on EPF withdrawals.