EPF Withdrawal Rules: When And Why Tax Might Apply To PF Withdrawals

Companies with 20 or more employees are mandated to register with the Employees' Provident Fund Organization ( EPFO ), making PF account deductions a common occurrence in the organized sector.

While many employees assume that withdrawals from EPF accounts are tax-free, the reality is nuanced. Tax obligations may arise under certain circumstances.

Withdrawals made after five years of contributing to EPF are typically tax-exempt for the account holder, irrespective of whether they've worked for one or multiple companies during this period. However, premature withdrawals—before the completion of five years—may incur taxation.

Exceptions exist where tax exemptions are granted for withdrawals made before the five-year mark. These exceptions include situations like job loss due to the employee's ill health, business closure by the employer, or other non-employee-responsible reasons.

In instances of premature withdrawal, the tax liability arises in the same fiscal year as the withdrawal. For instance, if someone begins contributing to PF in 2021-22 and seeks to withdraw in 2024-25, taxes would apply in 2024-25.

Tax calculation is based on the applicable slab rate corresponding to the individual's total income in the year of PF contribution. Withdrawals encompass four components: employee and employer contributions , along with interest on both. Premature withdrawals trigger taxation on all four components.

Notably, tax liability on employee contributions hinges on two factors. If an employee claims deductions under Section 80C, their contributions become taxable and are treated as part of their salary. Conversely, contributions without 80C deductions remain non-taxable. Meanwhile, employer contributions and accrued interest are considered part of the salary.

Premature withdrawals are subject to taxation. If withdrawals occur before the five-year mark and the subscriber's PAN card isn't linked, a 20% deduction is applied. Linked PAN accounts incur a 10% TDS deduction rate.

However, withdrawals below Rs 50,000 from EPF accounts are exempt from TDS. Individuals below the taxable income threshold can avoid TDS by submitting Form 15G or 15H.