What is Employee Provident Fund (EPF)?
Employee’s Provident Fund is a compulsory component of the salary of employees. A part of the basic salary of the employee (12% of the basic salary and dearness allowance) is directed to EPF account and then the employer pays the remaining salary. Apart from the employee’s contribution, the employer is also required to contribute an equal amount of the employee’s basic salary, i.e. 12% of the basic salary and dearness allowance, towards the EPF account. The purpose of EPF investments is that the employee can create a good retirement corpus over his period of active service.There are various benefits of EPF :
- This retirement corpus would then provide employees funds to meet their retirement expenses.
- EPF contributions also give employees tax benefits.
- The investment made towards the EPF account is allowed as a deduction under Section 80C up to INR 1.5 lakhs. The interest earned is tax free and the amount received on maturity of the EPF account is also tax-free.
Maturity of EPF
The EPF account matures when the employee attains 58 years of age. Alternatively, if the employee is unemployed for a consecutive period of 60 days, the balance in the EPF account is paid in full to the employee without incurring any tax. But what if the employee withdraws from the EPF accounts before maturity or when he still has a job?
EPF Partial Withdrawals
EPF account allows partial withdrawals for specific purposes. If you need funds for arranging a wedding, buying a home, renovating a house, paying off a home loan, medical emergencies, meeting education costs, etc., you can withdraw from the EPF account. However, such withdrawals are subject to certain terms and conditions. While you might know the terms and conditions associated with partial withdrawals from the EPF account, do you know whether TDS would be levied on such withdrawals or not?
TDS (Tax Deducted at Source) is levied in many instances before an income is paid to you. For instance, your employer deducts TDS from your salary before paying you the net amount. In case of interest earned, a TDS might be deducted from such interests, etc. Even in case of EPF withdrawals, TDS might be deducted under certain instances. Let’s understand what these instances are and how TDS is deducted –
TDS on EPF withdrawals
Under Section 192A of the Income Tax Act, TDS would be deducted from EPF withdrawals under the following conditions –
- The employee withdraws more than INR 50,000
- The employee has not completed 5 years of active employment
Both these conditions, when fulfilled, would result in TDS application on the amount withdrawn. Here’s a brief look into TDS application when the above-mentioned conditions are combined –
|The employee has not completed 5 years of service and withdraws more than INR 50,000 from EPF account||TDS would be levied|
|The employee has not completed 5 years of service and withdraws less than INR 50,000 from EPF account||No TDS would be levied|
|The employee has completed 5 years of service and withdraws more than INR 50,000 from EPF account||No TDS would be levied|
|The employee has completed 5 years of service and withdraws less than INR 50,000 from EPF account||No TDS would be levied|
Thus, only when the amount withdrawn is more than INR 50,000, the completed years of service are considered for the application of TDS. If the employee has not completed 5 years of service, TDS would be levied and if the employee has completed 5 years of service, TDS would not be levied.
Example Suppose the salary (basic + dearness allowance) of Mr. Sharma is INR 6 lakhs annually. His salary increases by INR 2 lakhs every year. The EPF contributions would be 12% of the annual salary. Mr. Sharma’s contribution to the EPF scheme for different financial years would be as follows –
|Financial year||Salary income||Mr. Sharma’s contribution||Interest @8% (assumed)||Employer’s contribution||Interest @8% (assumed)|
His tax liability for the above-mentioned financial years would be as follows –
|Financial year||Salary income||Section 80C deduction for EPF contribution||Tax liability|
|2015-16||6 lakhs||72,000||10% on 2.5 lakhs + 20% on 28,000 = 30,600|
|2016-17||8 lakhs||96,000||10% on 2.5 lakhs + 20% on 2.04 lakhs = 65,800|
|2017-18||10 lakhs||120,000||5% on 2.5 lakhs + 20% on 3.8 lakhs = 88,500|
|2018-19||12 lakhs||144,000||5% on 2.5 lakhs + 20% on 5 lakhs + 30% on 56,000 = 129,300|
If Mr. Sharma withdraws his contributions from the EPF scheme completely, his tax liability would be calculated as follows –
|Financial year||Salary income||EPF contributions of self and employer including interest earned on both||Withdrawal Section 80C deduction for EPF contribution||Total taxable income||Revised Tax liability||Tax already paid||Tax payable|
|2015-16||6 lakhs||155,520||72,000||827,520||10% on 2.5 lakhs + 20% on 327,520 = 90,504||30,600||59,904|
|2016-17||8 lakhs||207,360||96,000||11,03,360||10% on 2.5 lakhs + 20% on 5 lakhs + 30% on 103,360= 156,008||65,800||90,208|
|2017-18||10 lakhs||259,200||120,000||13,79,200||5% on 2.5 lakhs + 20% on 5 lakhs + 30% on 379,200= 226,260||88,500||137,760|
|2018-19||12 lakhs||311,040||144,000||16,55,040||5% on 2.5 lakhs + 20% on 5 lakhs + 30% on 655,040 = 309,012||129,300||179,712|
So, though Mr. Sharma withdrew the balance in the financial year 2019-20, the tax liability is calculated considering the tax slab rate of the year in which investments were made.
Exemption from TDS on EPF withdrawals
There are instances when TDS is not levied on EPF withdrawals even though the amount is more than INR 50,000 and the employee has not completed 5 years of service. These instances include the following –
- When the EPF is transferred from one PF account to another PF account (generally done in case of a job change)
- When the employee’s services are terminated because of his bad health, when the business is discontinued, when the project is completed or in case of any other reason which is not under the control of the employee
- If the employee has submitted his PAN details and Forms 15G or 15H
Recognition of the EPF fund
If the EPF fund is not recognised by the Commissioner of Income Tax, it would not be called a recognised provident fund. If any withdrawal is being made from an unrecognised provident fund, the withdrawal would attract TDS irrespective of the amount withdrawn and the completed years of service.
Rate of TDS deduction
The rate at which TDS would be applicable depends on whether the employee has submitted his PAN details. If PAN details have been furnished, the rate of TDS would be 10%. However, if PAN details are not furnished, TDS would be deducted at the maximum tax slab rate which is 30%.
Forms 15G and 15H
Form 15G is meant for resident individuals and HUF’s who do not have a taxable income. If, the income of resident individuals and HUFs from all sources does not exceed the limit of minimum exempted income (INR 2.5 lakhs as per current tax slab rates), they can submit Form 15G. The form would be a self-declaration stating that the income is within the exempted limit. As such, TDS would not be deducted from the income payable to the assessee.
Form 15H is for senior citizens aged 60 years and above. This is also a self-declaration form wherein the senior citizen states that his income from all sources is within the exempted limit. If the form is submitted, TDS would not be deducted.
So, understand when TDS is levied on withdrawals from your EPF account to know the amount that you would get on such withdrawals. You can also claim a refund of the TDS deducted if your tax liability is less than the TDS deducted and deposited on your behalf.
Frequently Asked Questions
Q- Do the years of temporary service count when calculating the completed years of service?
No, the period of temporary employment is not considered in calculating the completed years of service. Even though the employee has worked for 5 years or more but if some years were spent in temporary employment, those years would be excluded from calculation. If, after exclusion the number of completed years of permanent service is less than 5 years, TDS would be charged.
Q- Can NRIs submit Form 15G?
No, Form 15G is only meant for resident individuals.
Q- Where can I check the total TDS deducted in a financial year?
The details and amount of TDS deducted on your incomes within a financial year can be checked in Form 26AS which is available online on the official website of the income tax department.
Q- Which form is to be submitted for TDS on EPF withdrawals?
The details of TDS on EPF withdrawals is furnished in Form 19
Q- Where should be the PAN details furnished?
The PAN details should be furnished in Form 19 and also Forms 15G an d 15H is they are submitted.
Q- Do I need to be employed with one employer for 5 years to escape the tax liability on EPF withdrawals?
No, when calculating the tax liability on EPF withdrawals your total years of service are taken into account. These years can be spent working for one employer or for multiple employers.
Q- In which year will EPF withdrawals be taxable?
EPF withdrawals would be taxable in the year in which you withdraw from the scheme if you have not completed five years of active service.
Q- What would happen to the tax liability if I had not claimed 80C deductions when contributing to the EPF scheme?
If you did not claim Section 80C deductions for your EPF contributions, then, at the time of calculating the tax liability on your withdrawals, the amount of your contribution would not be considered. Tax liability would be calculated only on the employer’s contribution and the interest earned on your and your employer’s contribution.
Q- Under which head of income would the tax liability fall?
You and your employer’s contribution to the EPF scheme and the interest earned on the employer’s contribution would be taxed under the head ‘income from salary’. The interest earned on your contribution to the EPF scheme would be taxed under the head ‘income from other sources’.
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