Find out if you need to pay tax on EPF withdrawal
I served in a company for 5+ years and shifted my EPF to another company where I served for two years. After this 2nd work, I left work. What will be the tax treatment of my EPF now? - Anonymous
The main objective of the mandatory provident fund deductions from our salary is to create a retirement corpus and hence, the money received on retirement is completely tax-free.
However, even before retirement, it is quite possible to make partial or complete withdrawals in certain situations. Withdrawing your complete provident fund accumulation is allowed if one stays unemployed for more than two consecutive months. Partial withdrawal is allowed on buying a house and certain other situations.
Calculating the tenure
Taxability of withdrawal before retirement depends on whether you have been employed and contributed to the same provident fund account for at least five years. Here one must note that, if you are diligently transferring your provident fund account with a change in job, the tenure served under the previous employers is also considered.
Let's say, you worked with a company from January 2017 to December 2020 (four years) and then switched jobs in January 2021. While doing so, you also transferred your provident fund account. In such a case, the five-year period would be completed in December 2021. While you would have served the new employer for only one year, the previous four years would also be counted. Likewise, if there would have been a gap of one month between the job switching, then the five-year period would be completed in January 2022. The one month for which you were not employed will not be counted.
Tax implications if the EPF amount is withdrawn before five years
The entire amount withdrawn is taxable. The monthly provident fund deduction has two parts, employee's (your contribution) and a matching contribution by your employer. The employee's contribution is eligible for a deduction from taxable income under Section 80C of the Income Tax Act. If you had claimed the same, it now needs to be reversed and the tax liability should be re-calculated, considering what would have been the tax liability if you would have not claimed that deduction. The balance needs to be paid. Likewise, the employer's contribution would have earned a tax-free component of the salary that year. The same also needs to be reversed. The interest earned should be taxed as 'income from other sources'.
Further, one should note that if the withdrawal amount exceeds Rs 50,000, it will be liable for a TDS (Tax Deducted at Source) at the rate of 10 per cent.
Tax implications if the EPF amount is withdrawn after five years
If the withdrawal is made after completing five years, then it is completely tax-free.
Suggested read: How to withdraw partially from PPF?