The Finance Bill, 2015, has mandated tax to be deducted at source on withdrawals from Employees’ Provident Fund (EPF) that take place before five years of inception. So, if you withdraw within five years, the withdrawals are taxed at the marginal rate or the rate at which you pay the income tax. In the past, this rule was regularly flouted, so, to ensure compliance, the bill has mandated a TDS (tax deducted at source) on early withdrawals.
Tax rules on EPF
Every month, a salaried individual contributes 12% of her salary in the EPF account and the employer matches the contribution. A part of the employer’s contribution may go to the Employees’ Pension Scheme. The contributions made to the EPF then compounds at a rate declared by the Employees’ Provident Fund Organisation (EPFO), every year. The contribution that you make as an employee, qualifies for a tax deduction up to `1.5 lakh under section 80C of the Income-tax Act. A deduction reduces your taxable income.
The interest that your fund accumulates along with the contributions made are tax-free on withdrawal if you withdraw the money after five years of continuous service.
In calculating the number of years, you can include the number of years of service in your previous job(s) as well provided you transferred the EPF money from your previous accounts.
This information is in any case available with the provident fund (PF) authorities because when you transfer your account, you need to give details of your previous employment. Transferring your EPF account when you change jobs is seen as continuation of the account. In fact, with the Universal Account Number (UAN), which was launched last year, you no longer have to transfer the money. Now, as you change jobs, you just need to give your UAN details to the new employer and the employer will begin contributing in your UAN account. This not only ushers in portability, but also makes it easier to compute the number of years in service. In case you have previous PF accounts, you may still need to transfer money to the current UAN account.
On withdrawal before five years, the corpus becomes taxable. So, you pay tax on the interest earned and on the employer’s contribution by calculating the tax liability on this contribution retrospectively. You may also forfeit the tax deduction benefits of section 80C on your contribution that were used in the past.
To ensure compliance, for withdrawals made before five continuous years of contribution, it is proposed that effective from June this year, the trustee of the EPF, or the person authorized to make payments under the EPF scheme, will deduct tax at source at 10% on withdrawal if the amount is `30,000 or more. After five years, the payment becomes tax-free.
For the purpose of TDS, the employee has to provide the Permanent Account Number. Otherwise, the tax will be deducted at the maximum marginal rate of 30.9%.
EPF is a long-term product that helps you save for retirement. Therefore, it’s in your interest to keep the EPF account going and avoid withdrawing sums from it.