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EPFO has over 6 crore subscribers
EPFO has over 6 crore subscribers

When employee provident fund (EPF) withdrawal becomes taxable

  • Income tax laws are designed to discourage early EPF withdrawal
  • In some cases, income tax laws offer some relaxation on EPF withdrawal

Financial planners advise against early withdrawal of employee provident fund or EPF savings as they are are meant for retirement years. Still, you should know the income tax implications of EPF withdrawal. Income tax laws are designed to discourage early EPF withdrawal. Salaried individuals contribute 12% of their salary towards their EPF account and the employer matches the contribution. The contributions earn interest according to the interest rate declared by the retirement fund body EPFO or Employees' Provident Fund Organisation every year.

Income tax rules on EPF withdrawal:

1) For income tax purposes, if the employee has rendered continuous service for a period of five years or more, EPF withdrawal does not attract any tax liability. For calculating the five-year time limit, services rendered with the previous employer can also included if the EPFO subscriber transfers the EPF account balance from the previous employer.

2) In some cases, there is a relaxation. In cases where the services of the employee has been terminated due to employees' ill health, contraction or discontinuance of the employer's business or any other cause beyond the control of the employee, the five-year rule does not apply and EPF withdrawals don't attract income tax.

3) On EPF withdrawal before five years of continuous service, TDS or tax deducted at source is levied at 10%. If the amount is more than 50,000, no TDS is deducted. Form 15G/15H can be submitted to avoid TDS for subscribers having no taxable income.

4) An EPF account where there is no fresh contribution for three years is considered an inoperative account. After change of rules by EPFO in 2016, all EPF accounts continue to earn interest even if there is not fresh contribution or the employee ceases to be in job. However, any accretion to such balance, post cessation of employment, is taxable in the EPFO subscribers' hands at their income tax slab rates, according to a ruling by Bengaluru Tax Tribunal in 2017.

4) Income tax exemption is also allowed for one-time portability from a recognized provident fund to NPS. This had come into effect from assessment year 2017-18.


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