The Employee Provident Fund (EPF) is an investment and more beneficial scheme enacted by the Government in the common interest of employees. In this scheme, the employer and employee, both are required to contribute an amount which is calculated on the basic wages, dearness allowance and retaining allowance (if any).

Employer Contribution

The employer is required to contribute minimum 12% of basic wages, dearness allowance and retaining allowance (if any).

However, any amount contributed by the employer over and above 12% will be taxable in your hands as ‘Income from Salary’.

Employee Contribution

The employee is also required to contribute matching amount of contribution of employer [i.e. minimum 12%]. However, you can contribute more than 12% which is also allowed as deduction u/s 80C from your gross total income.

Taxability on EPF withdrawal  

The amount withdrawn from EPF is consists of principal [i.e. Contribution] and interest earned on it.  There is difference of taxability on withdrawal on the basis of time of withdrawal.

There is generally two scenario of withdrawal:-

Scenario – A Taxation when withdrawal is made before 5 years of continuous service

If you wish to withdraw before 5 years of continuous service, then tax liability would be as under:

Principal amount [i.e. Contribution] Interest earned
Employer’s Contribution is fully taxable. Interest earned on Employer’s Contribution is fully taxable as ‘Income from Other Sources’.

 

Employee’s Contribution is fully taxable if you have availed deduction u/s 80C in the year of investment. Otherwise, fully exempt from tax Interest earned on Employee’s Contribution is fully taxable as ‘Income from Other Sources’.

 

However, the above rule will not be applied if the services has been terminated by reasons of :-

  • Employee’s ill-health
  • Contraction
  • Discontinuance of the Employer’s business
  • Causes beyond the control of the employee

Scenario – B  Taxation when withdrawal is made after 5 years of continuous service

If you wish to withdraw the amount in your EPF account after 5 years of continuous service then the entire amount including the principal and interest withdrawn by you shall be tax- free. The interest earned with respect to your contribution and your employer’s contribution is exempt from tax. 

DISCLAIMER: The views expressed in this article are strictly of the author. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation by the author. The author does not accept any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

(Author can be reached at: cavrjsharma@gmail.com)

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Qualification: CA in Practice
Company: Sharma Vikas and Associates, Chartered Accountants
Location: Delhi, New Delhi, IN
Member Since: 25 Jan 2019 | Total Posts: 6

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3 Comments

  1. Ramamoorthy Tirur says:

    I have withdrawn RSS. 35 Lakhs from my PF amount and purchased a house for me in native place. I am a senior citizen but not yet retired. My salary income is Rs. 12 lakes. Should I show the PF withdrawals in my income and pay tax on it Or should I show in income and claim exemption or need not show the same in income at all? Please advise me.

  2. Amit Choudhary says:

    What would be the tax liability if I left my Job after 2 year of service but withdraw my EPF after 5 years of leaving the job?

    1. cavrjsharma says:

      If you left the job without completing continous 5 years and withdraw even after 5 years, the same would be taxable.

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