Gone are the days when you would join a company at the age of 25 and retire from the same company after working for 35 years. There are so many opportunities. With 25-30% hike in salaries common while switching jobs, a number of us sometimes tend to forget about a corpus that you have been accumulating (in many cases, unknowingly) for your retirement. That corpus is Employee Provident Fund (EPF).
Some just forget about it while switching jobs while others feel that that transferring the EPF balance to the new employer is too much hassle.
In this post, I will discuss tax implications of withdrawing from your EPF account.
How much do I contribute to EPF every month?
Every month, you contribute a 12% of your basic salary (Basic + Dearness Allowance) to the EPF account while your employer makes a matching contribution of 12%. A part of employer contribution goes towards pension scheme but let’s ignore such aspects in this post.
Is withdrawal of EPF balance taxable?
Withdrawal of accumulated balance from EPF is taxable if you have not rendered 5 years of continuous service with the employer.
While calculating this period of continuous service, the term of previous employment is also included. However, in such a case you should have transferred accumulated EPF balance from your old employer to EPF account maintained with the current employer.
There are a few scenarios where withdrawal from EPF account before 5 years is not taxable.
- Employment is terminated because of employee’s ill health
- Discontinuance of employer’s business
- Any other reason which is beyond the control of employee.
How to calculate tax on EPF Withdrawal?
As mentioned in the previous section, there is tax on EPF withdrawal if you have not completed five years of continuous service (with one or more employers).
Investment in EPF falls in Exempt-Exempt-Exempt (EEE) basket.
Own contribution to EPF account is eligible for tax deduction under Section 80C of the Income Tax Act.
Interest earned is exempt from income tax. Additionally, the maturity amount is exempt from tax.
Apart from this, employer contribution to the EPF account is exempt from income tax under Section 10 of the Income Tax Act.
If you withdraw your EPF before rendering 5 years of continuous service, all the tax benefits are reversed.
Your EPF balance can be broken down into 4 parts.
- Your own contribution to EPF
- Interest on your contribution
- Employer’s contribution to your EPF account
- Interest earned on your employer contribution
If you withdraw before 5 years, the employer contribution and the interest on the employer’s contribution are taxed as salary.
You would have received tax benefit for contribution to EPF under Section 80C of the Income Tax Act in the previous financial years. If you withdraw before 5 years, such tax benefits will be withdrawn. Essentially, own contribution will be treated as salary.
Interest on your own contribution to EPF account shall be treated as “Income from other sources”
To calculate tax liability, you need to add back the contribution and interest to the income of the previous financial years in which such contributions were made or interest accrued.
For instance, if you withdraw after 3 years, contributions (and interest earned) in the first year will be added to taxable income of the first year. Similarly, contributions (and interest earned) in the second year will be added to taxable income of second year. And so on.
Based on revised taxable income for the previous years, your tax liability will be recalculated for those years. You will have to pay the difference for all the years (including cess and surcharge, if applicable) in the year of EPF withdrawal.
For instance, your revised tax liability in the first year is Rs 80,000 (you had actually paid Rs 70,000). In second year, it was Rs 85,000 (you had actually paid Rs 72,000). For the third year, it comes to Rs 80,000 (you had paid Rs 65,000). Hence, the extra tax to be paid in the year of withdrawal will be Rs 38,000. Cess and surcharge, if any will be extra.
You can refer to Rule 9 of Part A of Schedule IV of the Fourth Schedule of the Income Tax Act for exact wordings in this regard.
Tax Deduction at Source on EPF Withdrawals
TDS will be deducted if both the following conditions are met.
- You have not completed five years of continuous service (otherwise EPF withdrawal is exempt from tax and the question of TDS does not arise)
- Withdrawn amount is Rs 30,000 or more.
TDS is deducted at 10% of the withdrawn amount if the PAN has been furnished. If PAN is not made available, TDS is deducted at the marginal income tax rate i.e. 30%.
Please understand deduction of TDS does not complete your income tax liability. You must pay additional tax at the time of filing income tax return. Alternatively, if excess income tax has been deducted, you can claim refund while filing income tax return.
You can submit Form 15G/15H if you want to avoid TDS. However, you can submit form 15G/15H only if your tax liability (even after EPF withdrawal) for the financial year is NIL. Form 19 for EPF withdrawal
You can also visit provisions related to TDS on EPFO website.
Must Read: How to save TDS on Bank Fixed Deposits?
When can I withdraw from my EPF account?
You can withdraw from your EPF account provided if you have not taken up employment for 2 months after leaving your job.
A number of friends didn’t transfer their EPF accounts while switching their jobs because they thought it was too much hassle. They didn’t really need any money. There were right too. It took months for the balance from the account to be transferred to the EPF account from the new employer. And tracking was a nightmare.
With the help of technology, the entire transfer process has been simplified. Hence, you have one less excuse to withdraw from your EPF account.
Think twice before withdrawing from your EPF account. It is a good investment product for retirement and should be used that way only.
These days, New Pension Scheme (NPS) is giving a serious competition to EPF. With NPS, there are clear rules that prevent complete withdrawal from the corpus. Hence, in case of NPS, discipline is forced.
Not such forced discipline in EPF. You need to exercise discipline yourself.
The only reasons, acceptable to me, for withdrawal of EPF balance are cases of emergency or when you are taking a break from employment. The EPF balance stops earning any interest if no contribution has been made to the account for three years. Thereafter, the account is considered dormant and no interest is paid on such accounts. Hence, it may make sense to withdraw the amount and invest elsewhere.
So, don’t withdraw from EPF just because you can.