Funds withdrawn from the EPF for reasons other than covid before the completion of five years of service attract tax
The government had last year allowed employees to withdraw from their provident fund account in case they needed emergency funds due to financial stress caused by the covid-19 pandemic.
Under the provision, a member of the Employees’ Provident Fund Organisation (EPFO) can withdraw up to 75% of his/her provident fund balance or three months’ basic wages plus dearness allowance, whichever is lower.
So, for example, in case you have a balance of ₹1 lakh in your provident fund account and your three months’ basic pay and dearness allowance add up to ₹45,000, then you can withdraw up to ₹45,000.
Such withdrawals are generally processed within three days of receipt of claims.
However, if you are planning to opt for such a withdrawal from the provident fund, it’s important to understand the tax implications.
As these withdrawals are made due to covid-related stress, the government has made such withdrawals tax-free in the hands of employees.
Apart from this, the EPFO allows taxpayers to withdraw partially for specific purposes such as buying a house, child’s education, marriage, etc. These withdrawals are generally allowed after five years’ service and are hence tax-free.
The EPF balance can also be fully withdrawn after two months of unemployment.
Funds withdrawn from the EPF for reasons other than covid before the completion of five years of continuous service attract tax.
“If the PF outstanding balance is withdrawn before five years of completion of service, then it is taxable under the income tax law. If the withdrawal amount is more than ₹50,000, then tax is deducted at source (TDS) at the rate of 10% under Section 192A,” said Kapil Rana, founder and chairman, HostBooks Ltd, a cloud-based platform for accounting and compliance purposes.
“In case of absence of PAN, TDS will be deducted at the rate of 30%. Also, in case the withdrawal amount is less than ₹30,000, TDS deduction is not required,” he added.
Apart from this, the taxpayer will have to show the receipt in the income tax return (ITR). The deduction claimed against the emplo-yee’s contribution under Section 80C has to be reversed.
“It is slightly complicated to show the receipts in the ITR in the absence of specific provision. However, one can show both the employee and employer contribution under the head ‘salary income’, while interest earned can be shown under the head ‘income from other sources’,” said Tarun Kumar, a New Delhi-based chartered accountant.
Also, if TDS was deducted, don’t forget to adjust your tax liability by the same.
There are certain other exemptions that are available to employees under which withdrawals from the provident fund account are not taxable even if they are made before the completion of five years.
“If an employee has been terminated due to ill health or the employer’s business is discontinued or the withdrawal is beyond the control of the employee… then the withdrawals are not taxable even if they are made before five years of completion of continuous employment,” said Rana.
If the employee transfers the provident fund balance from one employer to another in case of job change, there are no tax implications.
So, if you are facing any financial stress due to covid, you can dip into your provident fund account.
However, experts advise that one should refrain from using this option in case there are other alternatives available as the provident fund is meant for your retirement savings.
Withdrawals in the initial years will lead to you losing the compounding on your contributions. Also, the provident fund is one of the few instruments that is giving an interest rate of 8.5%.
In case you withdraw, it will be advisable to increase the contribution through a voluntary provident fund if possible.