Moving abroad? Here's when your EPF withdrawal becomes taxable and how NRIs can avoid paying extra tax

Employees' Provident Fund (EPF) is one of the largest long-term retirement savings option for most salaried employees. Under the scheme, employees contribute 12% of their basic salary and dearness allowance (DA) every month. Employers are also required to make a matching contribution of 12%, which is split between EPF and Employees Pension Scheme (EPS).

Many Indians move abroad for employment, higher education or other opportunities. If you become a non-resident Indian (NRI), your EPF account does not automatically get closed, but the way it is treated under EPFO rules changes. These rules depend on the EPF account holder's employment status, citizenship, and the country they move to.

When does EPF proceeds become taxable?

If an account holder withdraws funds from EPF before completing 5 years of continuous service, the proceeds become taxable. In calculating 5 years of service, the person's tenure with the previous employer is also included.

No tax deducted at source (TDS) is applicable on EPF withdrawals of less than ₹50,000. Similarly, if you transfer your EPF balance when changing jobs and your total continuous service across these jobs is at least 5 years, the withdrawal remains tax free and no TDS is deducted. However, it is important to calculate the 5-year period carefully, as even a shortfall of a few days can result in the withdrawal becoming taxable.

If you have completed at least five years of continuous service, EPF withdrawals are generally tax-free, even if you later become an NRI. In such cases, you may choose to withdraw the funds before moving abroad, subject to EPFO rules. Here are some key EPF rules NRIs should know:

• When an Indian resident becomes an NRI, their EPF account remains active and continues to earn interest until the funds are withdrawn or transferred by the account holder.
• NRIs cannot continue contributing to their EPF account if they are no longer employed with an EPF-covered Indian employer.
• If you move abroad without withdrawing your EPF balance, you can still claim the funds as an NRI. However, it is advisable to wait at least two months after leaving employment before applying for withdrawal, as this helps ensure that EPFO records reflect your updated employment status, according to Bajaj Finserv.

How are the EPF proceeds taxed in India for NRIs

NRIs may still need to check the tax rules in their country of residence, as the withdrawn amount could be taxable there depending on local laws.

If you have completed 5 years of continuous service in India, the entire EPF withdrawal amount, including the employee's and the employer's contribution, as well as the interest, is fully exempt from tax in India. In such cases, no TDS is applicable on the withdrawal.

However, if the EPF balance is withdrawn before 5 years, TDS of 10% is applicable for those with a valid PAN card, and a higher interest rate for those who do not have a PAN. NRIs can also use Double Taxation Avoidance Agreement (DTAA) to reduce this tax burden, if applicable.

Which form to file for EPF withdrawal?

The following forms have to be filed by members during PF withdrawal:

• Form 19: For full and final settlement of EPF balance
• Form 31: Partial PF withdrawal

Once you submit a request, your EPF claim may be settled within 20 days for offline claims and 3-5 working days in the case of online claims with updated know-your-customer (KYC) process, according to ClearTax.