Key Budget Update: In cases where PAN is unavailable, the TDS rate on the taxable portion of EPF withdrawals has been lowered from 30% to 20% as per the 2023 budget.
The Employees' Provident Fund (EPF) is a retirement savings initiative tailored for salaried individuals. Employers and employees both contribute 12% of the employee’s basic salary to the fund monthly. Contributions made to EPF qualify for tax deductions under Section 80C. Additionally, employees can choose to contribute more than the mandatory amount, which is referred to as the Voluntary Provident Fund (VPF).
Understanding the tax implications and TDS rules on EPF withdrawals is vital for efficient financial planning.
Updates on Provident Fund
The Employees' Provident Fund Organisation (EPFO) has set an annual interest rate of 8.25% for the financial years 2023-24 and 2024-25.
Withdrawals from EPF are subject to taxation or exemption, depending on specific conditions.
Eligibility for EPF Withdrawal
Employees must meet the following conditions to withdraw the entire EPF balance:
- Retirement: Complete withdrawal is permitted upon retirement at the age of 55.
- Pre-Retirement: Employees can withdraw up to 90% of the EPF balance a year before retirement, starting at age 54.
- Unemployment:
- After one month of unemployment, 75% of the EPF balance can be withdrawn.
- The remaining balance is transferred to a new account upon re-employment.
- Full withdrawal is permitted after two months of unemployment.
- Without Employer Consent: EPF can be withdrawn without employer consent through an online process if the Aadhaar is linked to the Universal Account Number (UAN) and the employer has approved the withdrawal.
Partial Withdrawal Conditions
Partial withdrawals are allowed under certain circumstances, subject to specific conditions:
- Medical treatment
- Marriage expenses
- Educational needs
- Land purchase or house construction
- Repayment of home loans
- Renovation of a house
Tax Implications on EPF Withdrawals
EPF withdrawals comprise three components:
- Employee Contribution: This portion is tax-exempt unless deductions under Section 80C were previously claimed. In such cases, the benefit availed under Section 80C will be reversed for the respective years.
- Interest on Employee Contribution: Taxable under the “Income from Other Sources” category.
- Employer Contribution and Interest: Fully taxable and categorized under the “Salary” head. This component is subject to TDS, which is reflected in Form 26AS.
Tax on Withdrawals Before 5 Years
For withdrawals made before completing five years of continuous service:
- TDS is applicable if the withdrawal amount exceeds ₹50,000.
- No TDS is deducted for amounts below ₹50,000.
- The total duration of service, including transfers between employers, is considered when calculating the five-year period.
Tax Implications for Temporary Employees
Temporary employees are eligible for EPF contributions only after being included on the permanent payroll. If such employees withdraw EPF before completing five years of permanent service, the withdrawal will be taxed accordingly.
Unrecognized Provident Fund Withdrawals
Withdrawals from unrecognized provident funds, which lack approval from the Commissioner of Income Tax, are taxable regardless of the length of service.
Withdrawals After 5 Years
EPF withdrawals made after five years of continuous service are exempt from tax.
TDS Rates
- TDS is deducted at 10% for withdrawals exceeding ₹50,000 if the service period is less than five years and PAN is provided.
- Without PAN, TDS is deducted at 20%.
- No TDS is deducted if Form 15G or 15H is submitted, provided the individual’s total income falls below the taxable limit.
Taxability Scenarios
|
Scenario |
Taxability |
|
Withdrawal below ₹50,000 before 5 years |
No TDS, but taxable if income exceeds the threshold. |
|
Withdrawal above ₹50,000 before 5 years |
TDS @ 10% with PAN; No TDS with Form 15G/15H. |
|
Withdrawal after 5 years |
Exempt from tax and TDS. |
|
Transfer of PF to a new account |
Exempt from tax and TDS. |
|
Withdrawal due to uncontrollable circumstances (e.g., illness, employer business closure) |
Exempt from tax and TDS. |
Avoiding TDS on EPF Withdrawals
Consider these strategies to minimize or avoid TDS:
- Transfer your EPF balance instead of withdrawing it when switching jobs.
- Refrain from withdrawing funds until completing five years of continuous service.
- For withdrawals below ₹50,000, no TDS applies.
Conclusion
A clear understanding of the tax regulations governing EPF withdrawals can aid in effective financial management. By complying with the outlined rules and making informed decisions, individuals can optimize their savings while ensuring compliance with tax laws.
If you have any further questions or need assistance, feel free to reach out to us at admin@ushmaassociates.com or info@nricaservices.com, or contact us via call/WhatsApp at +91 9910075924.
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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.