Is a PF Withdrawal Taxable? Rules You Need to Know
Unravel the complexities of Provident Fund withdrawals. Gain clarity on their tax treatment and ensure accurate reporting for your financial planning.
Provident Funds (PFs) are a significant retirement savings mechanism. This article clarifies the tax treatment of provident fund withdrawals, detailing the conditions that determine whether a withdrawal is taxable or exempt, and how to report such income.
About Provident Funds
In India, the Employee Provident Fund (EPF) is a common mandatory retirement savings vehicle for salaried individuals. Under the EPF scheme, both the employee and their employer contribute a portion of the employee’s monthly salary, typically 12% of the basic salary and dearness allowance, into the employee’s EPF account.
Beyond the EPF, other related schemes exist, such as the Public Provident Fund (PPF) and the Voluntary Provident Fund (VPF). The PPF is a long-term savings and tax benefit scheme open to all individuals, including the self-employed, offering tax-exempt interest and withdrawals. The VPF is an extension of the EPF, allowing salaried employees to contribute an additional amount beyond their mandatory EPF contribution, up to 100% of their basic salary and dearness allowance.
Tax Rules for Employee Provident Fund Withdrawals
The taxability of an Employee Provident Fund (EPF) withdrawal depends on the duration of continuous service and the circumstances surrounding the withdrawal. If an employee withdraws their EPF balance after completing five years of continuous service, the entire withdrawal is exempt from tax. This tax-exempt status applies to both employee and employer contributions, along with the interest earned on both components. Continuous service includes periods where the EPF balance was transferred between employers without a significant break in contributions.
Withdrawing from an EPF account before completing five years of continuous service makes the withdrawal taxable. In such cases, the employer’s contribution and the interest earned on it are fully taxable as income. The interest earned on the employee’s contribution is also taxable as “income from other sources.” The employee’s own contribution is only taxable if a tax deduction was previously claimed under Section 80C of the Income Tax Act.
Tax Deducted at Source (TDS) applies if the taxable withdrawal amount exceeds ₹50,000 before five years of service. If the employee provides their Permanent Account Number (PAN), a TDS of 10% is deducted. Without a PAN, the TDS rate can be significantly higher, around 20%. To avoid TDS, individuals may submit Form 15G (for those under 60) or Form 15H (for senior citizens) if their total income, including the EPF withdrawal, falls below the taxable limit.
Certain exceptions allow for tax-exempt withdrawals even before the five-year continuous service period is met. These include termination of service due to the employee’s ill-health, the employer’s business closure, or other reasons beyond the employee’s control. If an employee changes jobs and transfers their EPF balance to the new employer’s account, the amount remains tax-exempt as it is considered a continuation of service. Partial withdrawals for specific purposes, such as medical emergencies, marriage, education, or house purchase, may also be exempt from tax under certain conditions, even if the five-year service period has not been completed.
Tax Rules for Public and Voluntary Provident Funds
Public Provident Fund (PPF) withdrawals are exempt from taxation. This scheme falls under the Exempt-Exempt-Exempt (EEE) tax category, meaning contributions, interest earned, and the maturity amount are all tax-free. This tax exemption applies to both partial and full withdrawals. Specific rules apply to partial withdrawals, which are allowed after six years from the account opening, subject to certain limits and conditions.
Voluntary Provident Fund (VPF) withdrawals follow the same tax rules as the Employee Provident Fund (EPF), as VPF is an an extension of the EPF. Thus, VPF withdrawals are tax-exempt after five years of continuous service. Withdrawals before this period are subject to taxation, similar to early EPF withdrawals. The interest earned on VPF contributions, up to a certain threshold, is also tax-exempt.
Including Taxable Withdrawals in Your Tax Return
When an EPF withdrawal is taxable, it must be reported accurately in the individual’s income tax return (ITR). The taxable portion of the withdrawal needs to be categorized under different income heads. For instance, the employer’s contribution and the interest earned on it are taxed under the “Salaries” head, as if they were part of the salary for the years they accumulated. The interest earned on the employee’s own contribution, if taxable, is reported under “Income from Other Sources.”
Individuals should gather relevant documentation for proper reporting. This includes Form 16 from previous employers, detailing salary and tax deductions, and Form 26AS, providing a consolidated statement of taxes deducted at source. Copies of Form 15G or 15H should be kept if submitted to avoid TDS. Withdrawal application forms, such as Form 19 for final settlement or Form 31 for partial withdrawals, also provide necessary details.
When filing the ITR, the taxable amount from the EPF withdrawal is added to the individual’s gross income for the relevant financial year and taxed according to their applicable income tax slab rate. Any TDS already deducted on the withdrawal will be reflected in Form 26AS and can be claimed as a credit against the final tax liability. If the total income, including the taxable EPF withdrawal, is below the exemption limit, a refund for the deducted TDS can be claimed. For complex cases, consulting a tax professional is advisable to ensure compliance and accurate reporting.