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Withdrawal from Provident Fund before Completion of 5 years taxable?

Withdrawal of Provident Fund may attract Income Tax. The Income Tax Department recently told EPFO (Employees Provident Fund Organisation) 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.

Withdrawal from Provident Fund (PF) Account before Completion of Five years taxable?

Withdrawal of Provident Fund may attract Income Tax. The Income Tax Department recently told EPFO (Employees Provident Fund Organisation) 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.

In most cases, the accumulated PF balance is withdrawn at the time of retirement, and therefore, not taxable in the hands of the individual. However, in certain cases like change in employment, an individual may even withdraw the PF balance earlier. The point one needs to remember is that the amount received from such PF is not exempt from tax in all cases. Only under the circumstances listed below will the amount withdrawn from PF be eligible for such exemption from tax.

  • If the employee has rendered continuous service with the employer for five years or more. Again, if the balance includes amount transferred from the individual’s PF account maintained by previous employer(s), then the years of continuous service rendered to the former employer(s) would be included for the purpose of computing the five-year period.
  • If the employee has not rendered continuous service of five years, but the service is terminated by reason of the employee’s ill health or discontinuance of the employer’s business or reasons beyond the control of the employee, the amount will be tax-exempt.
  • Another tax-exempt case is when, on the cessation of the employment, the employee finds another job and the the accumulated PF balance is transferred to his individual PF account maintained by the new employer.

In short, where the PF amount is withdrawn before five years of continuous service, it may be taxable in the hands of the individual as if the fund was not recognised from the start of the contributions. In such a case, payment received by the individual in respect of the employer’s contribution along with the interest accrual thereon is taxed as “salary”. Interest on the employee’s contribution is taxable as “other income”. Payment received in respect of the employee’s own contribution is exempt from tax (to the extent not claimed as a deduction earlier).

I-T provisions provide that the trustees of a recognised PF or any person authorised by the regulations of the fund to make the payment of the accumulated balance to the employee should deduct tax at source while paying the amount. Further, the person liable to deduct tax has to issue the certificate of tax deducted at source (Form 16) within the specified time frame to the employee depicting the details of taxes withheld from the accumulated PF balance and also comply with other salary-related compliance necessities. So the next time you think of withdrawing your PF, you must as an individual also assess whether the same is taxable or exempt.

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I worked with a private company for four and years and nine months. I have given a provident fund (PF) withdrawal request to my ex-employer. Will the PF amount be taxable?

We understand that the PF maintained by your former employer was a recognized PF. As per the provisions in the Income-tax Act, if the employee has rendered continuous service with his employer for five years or more, then the withdrawal of accumulated balance from such PF is not taxable at the time of termination.

Since the period of your services with the ex-employer is four and a half years which is less than five years, you shall be liable to tax on the amount withdrawn from your PF. In addition to the normal tax payable by you, you will be required to pay all the tax concessions availed by you so far on account of contribution to such recognized PF. Further, the total employer’s contribution plus interest thereon, which was not taxed earlier, shall be taxable as profits in lieu of salary.

However, if the accumulated balance in your PF account is transferred to your recognized PF account maintained by the new employer, no tax liability shall arise due to such transfer.

Image courtesy of Mister GC at FreeDigitalPhotos.net

(Republished with Amendments)

Categories: Income Tax

View Comments (237)

  • I was working in different banks for last 8 years. The following are my details :
    Organisation Joining Relieving Days worked
    A 12-01-2010 14-07-2011 548
    B 25-07-2011 24-04-2012 274
    C 11-06-2012 05-01-2013 208
    D 14-01-2013 03-10-2015 992
    C(again) 07-12-2015 22-09-2016 290

    Bank A and B have their own PF but the same was transferred to the Government PF on taking up a job with C.

    I withdrew my PF after working for 8 years and the same came to my account in February 2017 after deducting 10% TDS. I have claimed that amount under exempt income and claimed for the refund. Now my refund was not processed and recently I received a email from the Income tax department stating there is a mismatch of income from other sources. Please guide what to do.

  • I withdrew my PF after 5 years of my first contribution but my continuous service with employer was 3 years and 2 months only . TDS amount 10% was deducted. Am I eligible for refund or I need to pay remaining tax? If yes under which section I can claim refund ?
    Please help.!!

  • I retired from one company at the age of 58 and withdrew my PF after having served them for 20 years. Subsequently, after 6 months of my retirement, I was employed by another company where the retirement age is 60. Having now retired from this company too, having effectively worked less than 2 years, does my PF withdrawal from this 2nd company become taxable. Will the tax (TDS) be 10% and do I have to show this in my ITR. ?.

  • is epf taxable by cancellation of my eployer before 5 years of service and still i m continuing the emlpoyement

  • Hey,
    I left my previous company and reason for leaving is "CESSATION". I claimed my PF amount online with out PAN CARD. Amount is less than 30 thousand.
    Do I have to pay Income Tax for this amount ?
    Do I have to mention this amount while filing IT Returns ?

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