EPF Withdrawal: Tax implications on withdrawal of Employee Provident Fund balance
The Employees’ Provident Fund Scheme was set up with the primary intention of securing the retirement of the employees in the private sector. The said fund is the accumulation of the sum total of contributions made by the employer and employees over the period of employment. The Employees’ Provident Fund (EPF) rules have been amended from time to time and under the existing rules, employees are allowed to withdraw up to 90% of the accumulated balance for specified purposes and subject to certain conditions. Employees are also allowed to withdraw the entire accumulated balance in the EPF account in limited cases. Correspondingly, the Income-Tax Act, 1961 (the IT Act) also provides tax implications on such partial or complete withdrawal of the EPF amount.
Trigger of taxability
The domestic tax laws of India provide certain situations in which the withdrawal of accumulated EPF would not result in any tax liability in the hands of the individual. For instance, where an individual has rendered continuous service with the employer(s) for a period five years or more, such withdrawal is not taxable. For this purpose, the transfer of the EPF balance from the former employer to the new employer would be considered as “continuous service”. Further, in case an employee’s services have been terminated because of certain reasons beyond his/ her control such as ill-health or discontinuation of business, such withdrawal would also not trigger any tax implication, even if the number of years of employment is less than five years.
The withdrawal of the accumulated EPF amount prior to the completion of five years of continuous service for purposes other than specified above is liable to tax in the financial year in which such sum has been withdrawn. The EPF amount comprises of the employee’s contribution, employer’s contribution and the interest accrued on such contributions. It is important to note that the employee’s contribution is added to the individual’s income as “salary” if a deduction on account of the same had been claimed in any of the previous years and it is taxed at the rates applicable in the respective previous years. The portion of refund pertaining to employer’s contribution is taxed as “salary” in the year in which the same is received. The interest accrued on the employer’s contribution is again taxed as “salary” and interest on the employee’s portion of contribution is taxable as “other sources”.
Further, the EPF law also allows partial withdrawal of the accumulated EPF amount for specified purposes such as construction/ purchase of house, marriage of member or dependent, damage of property in natural calamities etc. with no tax liability arising on such withdrawals.
Withholding tax implications
The Employee’s Provident Fund Organization (EPFO) is required to deduct tax at source on accumulated balances withdrawn before five years of continuous service or in case other than termination of service beyond the individual’s control. The tax is withheld at the rate of 10 percent where the individual has provided his/ her Permanent Account Number (PAN). It is important to note that employees who are in higher tax brackets would need to discharge the additional tax liability on inclusion of such EPF withdrawal income in their tax return, either by payment of advance tax or by payment of self-assessment tax (as applicable).
In case where the PAN is not furnished by the individual, income tax will be withheld at the maximum marginal rate (MMR) applicable for that financial year. MMR is the rate of income tax (including surcharge on income tax, if any) applicable to the individual’s highest slab of income for the relevant financial year.
However, there would be no tax deduction at source if the individual submits the PAN along with Form 15G or 15H, wherein a declaration is provided that the individual’s total income does not exceed the maximum amount chargeable to tax after including the EPF accumulations. Form 15G may be submitted by an individual resident below the age of 60 years whose total income does not exceed Rs 250,000. Similarly, Form 15H may be submitted by senior citizens (60 years or more). Moreover, it is pertinent to note that no tax would be required to be deducted at source for EPF withdrawals up to Rs 50,000.
It is important that employees understand the tax implications, as discussed above in detail and summarized below, arising on withdrawal of the accumulated EPF amounts so that adequate taxes are paid and there is no scope left for any other interest or penal implications under the law.