Understanding the Taxation on PF and EPF Withdrawals in India

When it comes to understanding the tax implications of withdrawing from the Public Provident Fund (PF) or Employees' Provident Fund (EPF) in India, there are several key rules to be aware of. This article aims to demystify the tax percentages charged on PF and EPF withdrawals, covering important scenarios and providing clarity on tax-exempt cases.

Introduction to PF and EPF

The Provident Fund (PF) and Employees' Provident Fund (EPF) are two essential components of a formal employment in India. PF is a personal savings scheme aimed at providing financial security in retirement, while EPF is a mandatory savings program that covers both contributions from the employee and the employer. The Taxation of Withdrawals from EPF and PF is governed by various provisions under the Income Tax Act, 1961.

Sections Governing PF and EPF Withdrawals

The relevant provisions for determining the taxability of PF and EPF withdrawals are found in Rule 8 of Part A of the Fourth Schedule of the Income Tax Act, 1961. This rule outlines specific circumstances under which withdrawal of amounts from a recognized provident fund is exempt from tax.

Conditions for Tax-Free Withdrawals

Retirement Withdrawal

A member of the PF scheme is entitled to withdraw the full amount standing to their credit on retirement from service, provided they have attained the age of 58 years. This withdrawal is tax-free.

Five-Year Continuous Service

If the employee has rendered continuous service with the employer for at least five years, the amount withdrawn will be tax-free, provided it includes any amounts transferred from a previous employer's PF account. The continuous service period is calculated from the combined service with the previous employer.

Ill Health or Employer's Discontinuance

Withdrawals made due to the employee's ill health or due to the discontinuance of the employer's business, beyond the control of the employee, are also tax-free. In such cases, the employee can withdraw the entire account balance.

Transfer to New Employer

When an employee ceases employment and finds another job, if the accumulated PF balance is transferred to the new employer's individual PF account, such withdrawal is tax-exempt.

Taxation Before Five Years of Continuous Service

If the withdrawal is made before the employee has rendered five years of continuous service, the amount is subject to taxation. The fund will be treated as an unrecognised fund from the start, and the employee's contributions would be taxable to the extent of deductions claimed under Section 80C of the Income Tax Act, 1961.

It's also important to note that with effect from 10 February 2016, the withdrawal of the employer's share of EPF contribution is not allowed, and the retirement age for EPF withdrawal has been changed to 58 years.

Interest on PF and EPF Contributions

The interest earned on the employee's total contributions under the PF and EPF schemes is taxable as 'income from other sources' in the hands of the employee. This income from interest must be reported and taxed accordingly.

Conclusion and Further Reading

To get a comprehensive understanding of the tax implications of PF and EPF withdrawals, refer to our articles on 'Changes in EPF Withdrawal Rules from 10 February 2016' and 'Income Tax Overview'. These resources provide a detailed breakdown of the various heads of income subject to income tax in India.