Full withdrawal from the EPF account is allowed if an employee left his/her job and after two months did not join another job. The amount deposited and withdrawn from the Provident Fund account is tax-free. This is due to the fact that Provident Fund accounts fall under the EEE category i.e. Exempt on Investment, Exempted Interest and Exempt on Maturity. Although there is no tax on deposits and withdrawals from the Provident Fund, there are some conditions that must be met.
However, did you know that EPF can become taxable in certain circumstances? That is correct; for example, if an employer’s contribution to an EPF account exceeds a certain limit in a fiscal year, it may become taxable. There are a few more instances where you will be required to pay tax on your EPF.
There are several types of Provident Funds, the most common of which are as follows:
- Employees Provident Fund
- Public Provident Fund
This article is primarily concerned with the Employee Provident Fund Tax. For more information on the taxation of Public Provident Fund accounts, please see this article – What is PPF?
Here’s a look when contributions, interest earned and withdrawals from an EPF account becomes taxable.
When contribution to EPF account becomes taxable
The employee’s own contribution to the EPF is not taxable in accordance with current law. However, the contribution of the employer to the EPF account can become taxable effective from 1 April 2020 if it exceeds Rs 7.5 lakh in the financial year.
According to a new law announced in Budget 2020, if the employer’s total contribution to an employee’s National Pension System (NPS) account, superannuation fund, and EPF account exceeds Rs 7.5 lakh in a fiscal year, the excess contribution becomes taxable in the employee’s hands.
Case I : When your employer’s total contribution to your NPS, superannuation fund, and EPF account exceeds Rs 7.5 lakh in a fiscal year. Assume an employer contributes Rs 1 lakh to the superannuation fund, Rs 5 lakh to the NPS, and Rs 2 lakh to the EPF account in a fiscal year. This is a total contribution of Rs 8 lakh, which is Rs 50,000 more than the Rs 7.5 lakh tax-free limit. As a result, an employee must pay tax on the excess contribution.
Case II: When contributions to the EPF account exceed Rs 7.5 lakh in a fiscal year and no contributions are made to the NPS or superannuation fund. Assume an employee lacks an NPS account and a superannuation fund. The employer’s contribution to the EPF account, on the other hand, is Rs 8.5 lakh per fiscal year. In this case, too, the excess amount will be taxable in the employee’s hands.
As a result, the employer’s contribution to the EPF account becomes taxable in the hands of an employee in this case as well.
Tax on Employees’ Provident Fund account
The taxability of EPF can be divided into three categories: tax at the time of investment, tax on interest, and tax on withdrawal.
Tax at the time of Investment :
Both the employer and the employee contribute a portion of their pay to the provident fund account. The taxability of both of these contributions is explained further below.
Contribution from the Employer
When you make a contribution, the amount contributed by your employer is tax-free if it is less than the specified limit of 12 percent. Any amount contributed by your employer in excess of 12% is taxable in your hands as ‘Income from Salary.’
Contribution of Employees
Your contribution towards PF can be claimed as a deduction under Section 80C. Since, the maximum deduction allowed under section 80C is Rs. 150,000, therefore that is the maximum you can contribute towards it.
It is mandatory to contribute 12%, but you have the option to contribute more, which will be deducted from your salary. This amount will reflect in your PF statement as “EPF voluntary contribution”. However, you will only be able to claim a deduction of up to Rs. 150,000.
Tax on interest earned
Interest earned in excess of 9.5 percent is taxable as ‘Income from Other Sources’.
Tax at the time of withdrawal
An account’s withdrawal amount consists of the investment/principal part as well as the interest received on it. The taxability of the two varies and depends on at what duration/time interval withdrawal is done.
If the withdrawal is done before 5 years of continuous service, the taxability is different than if the withdrawal is made after 5 years of continuous service.
Tax when withdrawal is made after 5 years of continuous service
If you decide to withdraw funds from your PF account after 5 years of continuous service (account membership), the full amount, including principle and interest, will be tax-free. The interest gained on your investment and your employer’s contribution is tax-free.
Tax when withdrawal is made before 5 years of continuous service
The taxability of the investment amount and the interest amount differs if the money is withdrawn before 5 years. Let’s take a closer look at it.
As previously stated, the investment amount consist of both the employer’s and the employee’s contributions.
- Employer’s Contribution – At the time of withdrawal, the entire amount invested by your employer will be taxable in your hands as ‘Income from Salary.’
- Employee’s Contribution – If you claimed an investment deduction under section 80C while making the investment, the amount you invested will be taxed as ‘Income from Salary.’ If not, it will not be taxed since you would have paid tax on it when you made the investment.
The interest you earn on both your (employee’s) contribution and the employer’s contribution is taxed as ‘Income from other sources.’
As a result, if you leave before 5 years of continuous employment, the full amount invested and received is taxed under several areas of income.
- Exception to the rule if withdrawal is made before 5 years – If a withdrawal is made before 5 years of continuous service and the reason for discontinuation of service falls into any of the following reasons, it will be treated as if it was made after 5 years, i.e. it will not be taxable.
- Medical Emergency
- Discontinuation of employer’s business
- Reasons beyond the control of the employee
Withdrawal Summary Table
TDS on PF Withdrawal
TDS is not deducted if a person withdraws less than Rs. 50,000, as per the Income Tax Act. However, if the withdrawal is more than Rs. 50,000 then it is obligatory for the assesses to give his PAN number.
If you are not liable to pay tax even after the addition of the withdrawal amount then you can furnish Form 15G/ 15H along with your PAN number and the TDS will not be deducted.
But if you fall in the tax bracket then you cannot give; Form 15G/ 15H, and since PAN is mandatory, upon submitting the PAN, a TDS at the rate of 10% shall be deducted.
However, if you forget to provide your PAN number to the EPFO officials and your withdrawal exceeds Rs. 50,000, TDS would be levied at a whopping 35%.
Employee Pension Scheme
The Employee Pension Scheme receives a portion of the employer’s contribution towards Pension Scheme. The maximum amount is Rs 1250. The money deposited to the EPS account can be withdrawn only before 10 years of continuous service, after which it cannot be withdrawn and the pension becomes mandatory.
However, if you decide to withdraw before 10 years, then the entire amount withdrawn by you becomes taxable. However, if you withdraw it on retirement, the entire amount will not be taxed. There are certain exemptions which can be claimed if the amount is withdrawn on retirement and the same have been explained in this article – Tax on Pension Income.