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The Coffee Break Guide to Compliance – Vol. 18

Posted by: on 11 October 2018 in Finance, HR, Human Capital Management, Payroll

This post is part of the Coffee Break Guide to Compliance by Anandan Subramaniam. Please subscribe to the blog updates if you’d like to be notified of these posts. Please comment below with your doubts and queries.

The Coffee Break Guide to Compliance – Vol. 18 {Pre-mature Withdrawal of PF and its Tax Implications}

The key objective of the Employee Provident Fund scheme is to secure the Saving, Insurance and Pension. The said fund forms part of the accumulations of the contributions, both by Employee and Employer.

Essentially, the contribution to EPF scheme is E-E-E (Remittance, Interest & Withdrawal/Settlement are Exempted from Income).

As the purpose is for social security, the EPF organisation encourages transfer of the funds in case an individual moves from one establishment to another. Nevertheless, the EPFO allows withdrawal and amends the rules from time to time for the same.

Withdrawal is allowed for the following

1. The member has reached the age of superannuation (i.e. 58 years).
2. The member has separated from a covered establishment and has been unemployed for a duration of more than 60 days from such separation.
3. The member has separated, and needs to meet medical expenses due to serious illness.
4. The member has separated from the covered establishment and is settling abroad permanently.
5. The female member has got separated from a covered establishment, and is getting married.

Such withdrawals are subject to TDS applicability on certain conditions, under Income Tax Act, 1961.

There will not be any Tax Deducted at Source (TDS) in the following cases

  • If the Fund is transferred from one account to another
  • If the termination of service is due to
    • ill health of member (or)
    • discontinuation of business of employer (or)
    • completion of project (or)
    • any other reason which is beyond the control of the member.
  • If the member withdraws the fund after 5 years of service (within the same organisation or aggregate of service in different covered establishments)
  • If the withdrawing fund value is less than ₹50,000 but the member has rendered service of more than 5 years
  • If member withdraws fund amount that is more than or equal to ₹50,000, but the service of less than five years, and submits Form 15G / 15H along with their PAN.

Applicability of Tax Deducted at Source (TDS) for PF

According to rule number 9 of Schedule IV and Section 111 of the Indian Income Tax Act, 1961, the rules of unrecognised provident fund would be applicable in case of withdrawal before the completion of five years. All the four components of EPF will be taxable, i.e. Employee contribution, Employer contribution, Interest on Employee contribution and Interest on Employer contribution. The amount of tax liability would have to be recomputed for each of the financial year(s) at the income tax rate(s) that were applicable to the withdrawer in those respective years.

Impact of TDS for Individual PF Members

Deduction claimed under Section 80C

“The taxability of the contribution, i.e. Employee’s contribution, will depend on whether the member had earlier claimed deduction under Section 80C while filing his/her income tax return (ITR) in the previous years.”

According to rule 9 of Schedule IV of the Income Tax Act, the rules of unrecognised provident fund will apply, making all the four components (Employee contribution, Employer contribution, Interest on Employee contribution and interest on Employer contribution) fully taxable in the assessee’s hands.

Deduction not claimed under Section 80C

If the deduction under Section 80C is not claimed for the contribution made in the EPF, then only the Employee’s contribution will not be taxable. The other three components (Employer contribution, interest on Employee contribution and Employer contribution) will be taxable at the tax rates that were applicable in the year of contribution.

How Much Tax is Deducted at Source (TDS)?

  • If the Employee makes a withdrawal before the completion of five continuous years in the scheme, the principal amount as well as the interest accrued is subject to tax. This will be taxed for the current financial year.
  • For withdrawals before completion of five continuous years towards the scheme, the employee will be taxed
    • 30% + cess, of the principal amount and the interest accrued if he/she has not submitted their PAN
    • If the employee has submitted his/her PAN details to the EPFO authorities, 10% + cess TDS (tax deducted from source) will be applicable.

Funds transferred from one’s PF account towards the National Pension Scheme (NPS) will not attract tax when one makes a withdrawal. (Framework completed by PFRDA, but EPFO is still to amend the rules to switch the fund from EPFO to NPS).

As per the revised PF rules, a member can withdraw up to 75% of accumulated Fund after one month of quitting the job and keep the remaining 25% or withdraw the same after two month of such separation. (One month waiting period for the employer to make the remittance and the same is accounted in the employees PF account). Such withdrawal also will attract TDS rules, as stated above.


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