PF withdrawal tax: There are clear rules on how tax is levied on employer and employee contributions, interest and withdrawal in EPF. Tax and TDS can be avoided with the right planning and documents. Let’s know the complete details.
PF withdrawal tax: Employees Provident Fund (EPF) is considered to be the most powerful scheme for retirement in India. More than 7 crore members are associated with it across the country. It is overseen by the Employees Provident Fund Organization (EPFO), which is a statutory body of the Government of India.
Under the EPF scheme, both the employee and the employer make regular contributions. But it is important to know when and how tax is levied on these contributions and interest. Also, clear rules have been laid down on how tax can be avoided on EPF withdrawal.
When does PF get tax exemption?
According to the EPFO, it is mandatory for any provident fund account to be recognised by the Income Tax Department. Only Recognised Provident Fund accounts get tax exemption and other benefits under the Income Tax Act, 1961.
How are employer contributions taxed?
Under EPF rules, the employee deposits 12% of his basic salary and dearness allowance (DA) in PF. The employer i.e. his company or organization also has to contribute the same amount.
If the employer’s contribution exceeds 12%, then the excess amount is added to the employee’s income and tax is levied on it. Also, if the employer’s annual contribution exceeds ₹ 7.5 lakh, then it will be considered a perquisite i.e. a benefit other than salary given to the employee. Then it will be taxed according to the employee’s tax slab.
The employer also gets income tax relief. He can get tax exemption by deducting up to 12% of his contribution from his income.
How do employee contributions get tax relief?
An employee can get a deduction of up to ₹1.5 lakh on his contribution to EPF. This deduction is available under Section 80C of the Income Tax Act. However, only employees who choose the old tax regime can avail this benefit. The interest earned on EPF is tax-free as long as the interest rate does not exceed 9.5%.
However, a major change was made in Budget 2021. From the financial year 2021-22, if the total contribution made by the employee to EPF and VPF exceeds ₹ 2.5 lakh, then the interest received on it will be taxable. If the employee has only his contribution in his account and there is no contribution from the employer, then this limit goes up to ₹ 5 lakh.
In these cases, the Income Tax Department has clarified that from now on two types of PF accounts will be created. One will have information about taxable interest and the other about tax-free interest. Interest statements for both will also be issued separately.
Tax and TDS rules on EPF withdrawal
There are two ways of withdrawal of EPF- partial and full. EPFO gives the facility of partial withdrawal (Advance Withdrawal) to the employees for major reasons like marriage, education, buying a house or treatment. It is completely tax-free.
At the same time, tax on final withdrawal depends on the number of years you have been a member of EPFO. If you have contributed to EPF for more than 5 years, then the withdrawal will be completely tax-free. At the same time, if withdrawal is made in less than 5 years, then tax will be levied. However, tax relief is available under certain circumstances:
- Leaving the job due to health reasons.
- Closure of the company.
- Completion of the project.
In these circumstances, even if the membership has been less than 5 years, the withdrawal is considered tax-free. However, if you voluntarily withdraw PF after leaving the job and 5 years have not been completed, then TDS will be applicable.
- If PAN is linked then 10% TDS.
- If PAN is not linked then 34.608% TDS.
- If the withdrawal amount is less than ₹50,000, TDS will not be deducted.
Ways to avoid TDS: Form 15G and 15H
If a person’s total income is less than the tax exemption limit, then he can avoid TDS. For this, the Income Tax Department has provided the facility to fill Form 15G and 15H.
- Form 15G: Can be filed by resident individuals who are below 60 years of age and have total income below the tax limit.
- Form 15H: For senior citizens above 60 years of age.
- Exemption from TDS on EPF withdrawal can be availed by filing these forms, provided the income is below the prescribed limit.
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