Employee’s Provident Fund (EPF) is a welfare scheme for the benefit of the employees. It is a corpus built by an employee and employer by way of monthly contributions. The interest is also regularly credited to the provident fund account. At present, the EPF Interest Rate is 8.55% on contributions made by the employer and the employee.
Many people believe that the withdrawal of the accumulated balance of EPF by an employee is exempt from tax. It is not the case, the withdrawal is exempt only in the specified circumstances:
Exemption on withdrawal
There are 4 specified cases in which the amount withdrawn from the recognized provident fund is exempt. These cases are prescribed in Rule 8 of Part A to the fourth schedule of the Income Tax Act. The exemption is available in the following cases:
1. If the employee has rendered continuous service with his employer for a period of 5 years or more.
2. If the employee has not rendered continuous service for 5 years and his service has been terminated a) by reason of the employee’s ill-health or b) by the contraction or discontinuance of the employer’s business or c) other cause beyond the control of the employee.
3. If, on the cessation of his employment, the employee obtains employment with any other employer, to the extent the accumulated balance due and becoming payable to him is transferred to his individual account in any recognized provident fund maintained by such other employer.
4. If the entire balance standing to the credit of the employee is transferred to his account under NPS referred in section 80CCD and notified by the central government.
TDS on EPF Withdrawal
TDS is deductible on withdrawal of the accumulated balance if the amount is not exempt in the hands of the employee, owing to the provisions of rule 8 of Part A of the Fourth Schedule i.e. any of the 4 cases mentioned above. TDS is deducted at the time of payment of the accumulated balance due to the employee.
TDS is not deductible if the aggregate amount of withdrawal is less than Rs. 50,000/-. It is deductible at the rate of 10%. However, if the PAN of the recipient is not available then TDS is deductible at Maximum Marginal Rate which is 35.880% for the A.Y 2019-20.
Computation of Taxability on Withdrawal
The amount of PF withdrawal gets taxable if your case does not fall in any of the 4 exemption cases mentioned above. This withdrawal is taxable as if it is a withdrawal from the unrecognized provident fund. The total income of the employee is computed as if the fund was not recognized from the very beginning.
The total income will be recomputed in respect of his total income for each of the years concerned in which the amount was contributed and certain tax concessions were claimed by the employee for such contribution i.e. the benefits claimed over years in the form of deduction under section 80C for the contribution to the EPF has to be returned back. Apart from that the Interest accumulated on the EPF also becomes taxable Income.
The credit balance in the provident fund account consists of employer’s contribution, interest on employer’s contribution, employee’s contribution and interest on employee’s contribution. The taxability of each such item is as below:
Employer’s Contribution and Interest on Employer’s Contribution
The employer’s contribution and interest, thereon, would be taxable as profits in lieu of salary under the head salary income in the hands of the employee.
The employee’s contribution would be taxable to the extent of the deduction claimed under Section 80C in respect of such contribution, if any, under the Income-tax Act’1961.
Interest on Employee’s Contribution
The interest earned on employee’s contribution would be taxable under the head income from other sources in the hands of the employee.
Thus, the withdrawal of the EPF balance by an employee who has not rendered continuous service of 5 years and in certain other cases attracts tax liability. The employee can save his tax by transferring the accumulated balance of EPF with the new employer if he also maintains the recognized provident fund rather than withdrawing the same.