TDS on premature withdrawals from Recognized Employee’s Provident Fund (EPF)

Provident Fund (PF) is one of the best fixed-income instruments. This is so because PF is the ONLY debt product apart from PPF, where the interest rate is not only quite attractive but more-importantly tax free as well. Secondly, there is no limit on the amount. Disciplined saving every month is another plus point. People generally assume that the amount in their PF account- which comprises employee contribution, employer contribution and the interest earned thereon- is tax-free. Generally this assumption is correct because :

a) The PF amount is supposed to be withdrawn only on retirement (except for certain specified purposes); and

b) The PF amount is supposed to be transferred to the new employer as and when the job-changes happen.

But, due to the inconveniences involved, many people prefer to close their PF account with the previous employer(s) when they change their jobs; rather than transferring it to the new employer(s). This has become quite common as working with the same company for years together has nowadays become a rarity. A sharp rise in the withdrawals reported by the PF Office is a corroboration of this trend.

Provident Fund premature withdrawal rules have been made little bit stringent in the Budget 2015. The Income Tax Department recently told EPFO (Employees Provident Fund Organization) to deduct Tax (TDS) from the withdrawal amount, if the withdrawal happened before completing five years of subscription. Tax officials have cited a rule in the 1961 Income-Tax Act that taxes PF withdrawals by employees before completing five years of contributions into the EPF is taxable.

As per the provisions relating to (RPF) Recognized Provident fund contained the Act, the withdrawal of accumulated balance by an employee from the RPF is exempt from taxation. The PF balance of an employee is exempt from tax if it conforms to the rule 8 of Part A of the Fourth Schedule of the Income Tax Act. Conditions enumerated in all the three clause of the said rule 8 are required to be fulfilled in order to get such exemption. Conditions basically talks about availment of tax exemption if the service is rendered for a continuous period of 5 years or if the services are terminated by reason of employee’s ill health or for any other reason beyond control of the employee or if employee obtains other employment and the balance in the EPF account is transferred to the EPF maintained by the subsequent employer.

To discourage premature withdrawal of provident fund by subscribers, Union Finance Minister Arun Jaitley has brought in a provision to tax such early closures. He has inserted a new provision in his Finance Act 2015 that allows for tax deduction at source (TDS) on provident fund withdrawal. Under the new inserted Section 192A of Income Tax Act, provident fund withdrawal before five years of continuous service will attract a TDS (tax deducted at source) of 10%.The new provision of TDS deduction, however, will not be applicable if the provident fund withdrawal is less than Rs. 30,000.

Quoting PAN number has become mandatory for any subscriber who makes pre-mature withdrawal. The existing provisions for non-quoting of PAN provides for deduction of tax @ 20%. There may be employees who are liable to pay tax at the highest slab rate. In order to ensure the collection of balance tax by these employees, it is also provided in the newly inserted section that non-furnishing of PAN to the EPFS( Employees provident Fund Scheme) for receiving these payments would attract deduction of tax at the ‘maximum marginal rate’, which is the income-tax rate of highest slab of nearly 35 per cent. A vast majority of EPF members may not have a PAN card. The charging of income tax in respect of such members at the maximum marginal rate will be exorbitant and unfair.

A tax payer can save himself /herself from being taxed under the newly inserted section only by providing Self-declaration for non-deduction u/s the act in 15G/15H can be filed by assessee to the effect that his total income including taxable pre-mature withdrawal u/s 192A from EPFS does not exceed the maximum amount not chargeable to tax. Filling such forms would add to woes of EPF subscribers and more so when it is the avowed policy of the present government to move towards an era of paperless offices

The move is clearly aimed at promoting long-term saving; however such step by the income tax department would result in making the process more beneficial or would end up in creating more chaos that time will tell.

These changes will come into effect from June 1, 2015.

[Author can be reached at ca.pratik.arora@gmail.com]