Tax on PF Withdrawal: Tax Deducted at Source (TDS) is a means of tax collected at the very source of income. Any company or person making a payment is required to deduct tax at the rates prescribed by the Act within a specified period. A deductor is a person responsible for deducting tax. The person who receives the payment after the deduction of tax is called the deductee. TDS on PF withdrawal will be deducted only if the withdrawal is made before completion of 5 years of continuous service.
When PF withdrawal Taxable?
The contribution made towards an EPF account is availed as a deduction under section 80C of Income-tax act. The withdrawal of PF amount is taxable under the following circumstances.
- EPF Amount Withdrawn before Completion of 5 years.
TDS will be deducted if the PF is withdrawn before completion of 5 years of continuous service. The 5 years also includes the tenure of the previous employer. That is if you transfer the PF balance from the old to new employer and the total years of employment is 5 years or more then TDS need not be deducted.
- If the 5 years Includes the Time of Temporary Employment
If you were working as a temporary employee or as a contract employee then the employer is not liable to contribute to your PF account. After that, you joined as a permanent employee and you resign after 5 years of service then these 5 years include the period of temporary employment also.
- EPF Account is Unrecognized
An unrecognized PF account is one, which is not approved by the commissioner of the Income Tax Department. Even though if it is approved by the commissioner of Provident fund, to enjoy the income tax benefits it should be approved by the IT commissioner. All the PF withdrawals are taxed even if the employee has a continuous service of 5 years.
- PF Withdraw Amount is more than or Equal to Rs. 50000
If the employee withdraws more than or equal to Rs.50000 with less than 5years of service, then TDS will be deducted at the rate of 10% if Form 15G/15H is not submitted but the PAN is submitted. If the employee fails to submit the PAN then TDS will be deducted at the marginal rate.
When TDS will not be Deducted
- If the PF is transferred from one account to another account.
- If the PF amount is withdrawn after completion of 5 years.
- If the employee terminates the service due to ill health of member/ discontinuation of business by employer/ completion of project/ other cause beyond the control of the member.
- IF the PF payment is less than Rs.50000 but the service is less than 5 years.
- If the employee more than equal to Rs.50000 with service less than 5 years but submits Form 15G/15H along with their PAN.
PF Withdrawal Taxability
- Employee’s Contribution
The amount of employee’s contribution is not tax-deductible. However while contributing it if you have claimed it as Section 80c deduction in your income tax return, you may have to pay additional tax as if 80C was not claimed for those years.
- Interest on Employee’s Contribution
The interest earned on the portion of the employee’s contribution will be taxed under the head “Income from Other Sources”.
- Employer’s Contribution and Interest on the Employer’s Contribution
The amount of employer’s contribution and the interest pertaining to that is fully taxable under the head “Income from Salary”. If TDS is deducted it will reflect in Form 26AS.
TDS on PF withdrawal can be avoided by not transferring the balance from one account to another account while changing the jobs. If PAN is not submitted then TDS on PF withdrawal can be deducted at the highest rate of 30%. You can submit Form 15G/Form15H if tax on your total income including EPF withdrawal is nil. TDS is not deducted if Form 15G/Form 15H is submitted.