If you are one of those who withdraw their Employees’ Provident Fund (EPF) with every job they change, you would face a double disadvantage unknowingly. One, you are hampering a secure government-backed retirement income. Second, this tax-free income may end up becoming taxable in your hands. Withdrawing EPF prematurely before completing five years makes the income taxable.
What is EPF?
You can contribute 12% of your basic salary plus dearness allowance towards EPF. For this, you get a deduction under section 80C up to Rs1 lakh. Your employer matches this contribution. While you can increase your EPF contribution at your discretion, the employer may contribute only 12%.
Remember that only 3.67% of your employer’s contribution gets added to the EPF kitty. The remaining goes into a separate fund called the Employees’ Pension Scheme (EPS). On retirement, if you have kept your EPF account for at least 10 years, EPS guarantees you regular pension.
At present, the government gives an interest rate of 8.5% of EPF.
When you don’t pay tax
In tax parlance, the status of EPF is EEE (exempt exempt exempt). This means that EPF is tax-free at the time of investment, during the accumulation phase and at the time of withdrawal or maturity.
When you pay tax
However, you need to stay invested in EPF for at least five years to enjoy the tax-free status at the time of withdrawal. But what do you do if you shift jobs before completing five years in any organization?
The way out
You needn’t be in the same organization and have the same EPF account running to complete five years in your account. What you can do is get the EPF account you had in your earlier organization transferred to the new account your new employer opens for you. So, every time you change organization and take a new EPF number, you need to mention the old EPF number for any funds transfer to enable the EPF office to trace the date of your joining your initial job. After five years, the income automatically becomes tax-free.
How is the tax deducted?
An interesting point to note here is that the EPF office does not deduct income-tax on its own. The onus to pay taxes for any withdrawal before five years lies with you.