EPF: When can you withdraw, how is the money taxed, and how to avoid it

Withdrawals before five years are tax-free in cases of serious illness, employer discontinuation of operations, withdrawals not authorized by the employer, and advances under the EPF Scheme

Withdrawals from an Employee Provident Fund account before the completion of five years will be taxed at 20 per cent instead of 30 per cent if the users' PAN card is not seeded with the EPF account, according to Union Budget 2023.

What is an EPF 

Employee Provident Fund (EPF) is a compulsory saving plus retirement scheme, comprising of contributions from both employees and employers. Employees must contribute 12% of their basic pay every month towards the EPF account as per EPF norms, matched by the employer's contribution.

The interest rate for PF has been set at 8.15 per cent for FY2023-2024

Tax is generally applied on premature withdrawal of the EPF under certain circumstances. Currently, an employee's own contribution to the EPF account is not taxable. However, an employer's contribution to the EPF account is taxable if it exceeds Rs 7.5 lakh in a financial year.

1. Eligibility for EPF Withdrawals:

 

The EPF fund is non-taxable even if withdrawn before its lapse, subject to a withdrawal limit and certain conditions for the following reasons, explains Sandeep Bajaj, Managing Partner, PSL Advocates & Solicitors

1. Medical Needs-  An employee may take relief from the provident fund of their share plus interest, or six times their monthly wage, whichever is less, to pay for medical care.
2. Repayment of Home Loans- If the property is registered in their personal or owned jointly, the member may withdraw up to 90% of the corpus to pay off the outstanding home loan.
3. Wedding- It is possible to withdraw 50% of the employee's contribution plus interest in this case. However, to be qualified for withdrawal, at least seven years of service must have been completed. 
4. •Retirement- A person may take their provident fund corpus once he is 58 years old. The employee may withdraw up to 90% of the amount in the provident fund.
5. Unemployment- After one month of leaving a job, a subscriber may withdraw 75% of their EPF balance by EPFO regulations. The remaining 25% of the EPF balance may be withdrawn after unemployment for a period of 2 months.

EPF withdrawals for construction of property 
To be eligible for this withdrawal, you need to have completed five years of membership. The maximum amount that can be withdrawn is limited to 24 times the monthly salary for purchasing the house site or 36 times the monthly salary in case of the purchase of a house and construction of a house. The facility can be availed only if the purchase/construction is in the name of the PF account holder and his/her spouse.

Home renovation

You need to complete five years of membership. The maximum amount that can be withdrawn is equal to 12 times the monthly salary. This facility is applicable only for the house in the name of the PF account holder and his/her spouse.

To be eligible for this withdrawal, you need to have completed five years of membership. The maximum amount that can be withdrawn is limited to 24 times the monthly salary for purchasing the house site or 36 times the monthly salary in case of the purchase of a house and construction of a house. The facility can be availed only if the purchase/construction is in the name of the PF account holder and his/her spouse.

Tax on EPF Withdrawal

Your EPF payout has 3 components, as explained by ClearTax

Your contribution/Employee’s contribution - This is the amount contributed by you to your EPF. This portion of your withdrawal is not taxable. However, if you have claimed deduction under section 80C on your contribution in earlier years, you may have to pay additional tax as if 80C was not claimed by you for those years.

Interest on your/employee’s contribution- This portion is taxed as income from other sources.

Employer’s contribution and interest on employer’s contribution - Employer’s contribution and interest on it is fully taxable. It is taxed under the head salary in your tax return. When TDS is deducted on it, you are likely to see an entry under salary TDS in your Form 26AS for it.

12% employer contribution to EPF is tax free

At the time of making a contribution the amount contributed by your employer is tax-free if it is within the limit specified, which is 12%. Any amount contributed by your employer over and above 12% is taxable in your hands as ‘Income from Salary’’. An employee's 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.

Employer's contribution to EPF is taxable if it exceeds Rs 7.5 lakh in a financial year
"Tax is generally applied on premature withdrawal of the EPF under certain circumstances. Currently, an employee's own contribution to the EPF account is not taxable. However, an employer's contribution to the EPF account is taxable if it exceeds Rs 7.5 lakh in a financial year," said -Sandeep Bajaj, Managing Partner, PSL Advocates & Solicitors.
 

Taxation on Withdrawal:

TDS is applied to EPF withdrawals made before five years of continuous service. No TDS is applied if the withdrawal is for less than Rs 50,000 or if the employer is terminating the firm. 
 

"E.g. If a person joined a job in 2015; however, he resigned in 2019 to prepare for higher studies/government examinations, and joined the same company back later in 2021, it may seem that he has been in service for more than 5 years. However, such service has not been continuous. Therefore, if he withdraws his EPF before 2026, the same shall be taxable," said Jain. 

For calculating the period of five years of service, it is not necessary that service should be continued with the same employer. Period of previous employment is also considered for this purpose. 
 

One may file Form 15G to get an exemption
You get an exemotion by filing Form 15 if  your income for that year was less than the taxable limit and if one withdrew more than Rs 50,000 and worked for the company for less than five years. If one’s withdrawal exceeds Rs 50,000, and an EPF balance is withdrawn before five years of service, TDS is deducted at 10%.

TDS will be withheld at the  20% if PAN is not given. If there is no tax on one’s entire income, including EPF withdrawal, one may file Form 15G/15H. If Form 15G or Form 15H is filed, TDS is not applied. 
 

E.g. If one withdraws Rs. 10,000 from their EPF, the tax is 20% of Rs 10,000  ( Rs 2,000) if PAN & 15G/ 15H Forms are not given; however, the same reduces to Rs 1,000 if PAN is present and completely exempted when Form 15G/ 15H is submitted along with it. 

Finance Minister Nirmala Sitharaman reduced TDS rates from 30% to 20% on the taxable portion of EPF withdrawal in non-PAN cases during the presentation of Union Budget 2023-2024.

Tax when withdrawal is made after 5 years of continuous service

"If you wish to withdraw the amount in your PF account after 5 years of continuous service (membership of the account) then the entire amount including the principal and interest withdrawn by you shall be tax-free. The interest earned with respect to your contribution and your employers’ contribution is exempt from tax," said CA Karan Batra.

The following table by ClearTax will help you easily understand the taxability on withdrawal of EPF:

Some of the instances pertaining to the treatment of TDS are explained below:
 

Illness: An employee's employment is terminated due to illness before completing five years of continuous service; the employer's firm has stopped operations; external factors that are beyond the employee's control:
 

No TDS will be deducted in such a case. Since the withdrawal is tax-free, the person does not need to include it in their income tax return. 
 

Eg. If an employee was terminated at the time of Covid 19 and he withdraws the EPF during that time only to support himself, no TDS will be applied as the situation was beyond employee’s control.
 

Before completing five consecutive years of service, a sum of Rs 50,000 was withdrawn-

If the person is in the taxable category, he must include this EPF withdrawal in his income tax return. Therefore, no TDS is liable to be deducted in such a case.
 

EPF withdrawal after five years of continuous service-

Since, the withdrawal is tax-free, the person does not need to include it in their income tax return. Therefore, no TDS is liable to be deducted.
 

Transferring PF from one account to another after changing jobs-

No TDS shall be deducted in this case as the income is not taxable. Therefore, the person is not required to refund the same amount.
 

Upon transfer to NPS:
In case the entire balance in EPF account of the employee is transferred to his/her NPS account, then such transfer is exempt from TDS and will be excluded from the computation of the total income.

How to avoid paying tax on the withdrawal of EPF

While switching jobs, the taxpayer must avoid withdrawing iEPF funds. Instead, move the same to their new account at the new company. This ensures the requirement of five years of continuity.
 

The taxpayers can postpone withdrawals from their account for five years (constant employment with all employers); after which, there won't be any taxes due on such withdrawals.
 

The taxpayers must ensure that they do not withdraw an amount exceeding Rs. 50,000/- within the stipulated time period of five years to avoid paying taxes on such withdrawals.