Employee Provident Fund (EPF) scheme was instigated to provide substantial benefits to the employees at the time of retirement. Under this scheme, a specified amount is deducted from the salary of the employee as his contributions towards the PF fund. The employer also contributes certain amount towards the fund. Employees Provident Fund Organization (EPFO) has issued many circulars relating to the applicability of TDS (Income Tax deduction at Source) on PF withdrawals. Under the provision of Income tax law, withdrawal from the PF account by an employee without rendering continuous service for five years or more attracts tax.
Tax on PF Withdrawal is a major issue for every employee who leaves their job before the retirement. However, there are certain Provident Fund Taxation Rules that has to be followed by every employee scrupulously. In order to provide complete information on all those things, we have come up with a detailed guide that help all the employees know about the Provident Fund Taxation Rules, Tax Benefits of various PFs, tips to get rid of tax on PF and also to calculate TDS on PF withdrawals. So take a look!
PF Taxation Rules
The Employee Provident Fund is your retirement corpus. Generally, most of the employees understand the nature of tax-free EPF i.e. the Provident Fund which you receive is completely exempted from the tax.
Most of the people have a common perception that the EPF does not have any kind of tax issues. But, only few of them are cognizant of the term tax even in the PF Corpus. When the PF amount is subjected to the tax, the employee will get a PF balance by a reduction of 34.6% and will receive only 65.5% of the PF amount. The TDS can affect your provident fund at a severe rate. However, there is a facility of tax on the premature withdrawal of EPF.
Kinds of Provident Funds:
There are 4 types of Provident Fund that provide tax rebate. So let’s understand different kinds of Provident Funds in detail.
Statutory Provident Fund
Statutory Provident Fund, commonly termed as SPF refers to the Provident Fund formed under the Provident Fund Act of 1925. This fund is maintained by the Government and Semi Government organisations, railways, local authorities, universities and recognised educational institutions.
Recognised Provident Fund (RPF)
Recognised Provident Fund is a type of Provident Fund to which Employee’s Provident Fund and Miscellaneous Provisions Act 1952 is applied. This fund is applicable to an organization with strength of 20 or more employees (organisations with less than 20 employees can also join). According to Section 80C upto 12% of salary is being exempted from the tax.
A Recognized provident fund is authorized by the Commissioner of Income Tax. An employer and a group of employees can start this type of fund together by forming a trust.
Unrecognised Provident Fund (URPF)
This type of provident fund is not approved by the commissioner of income tax. Here, only the employer’s contribution is taxable as salary income. There will be no deduction under section 80-C. However, Employees own contribution is non-taxable.
Public Provident Fund (PPF)
Public Provident Fund was established for the benefits of general public. Any member of public whether a salaried employee or a self-employed person can participate in this fund. It is considered to be one of the best tax saving schemes in India.
Tax Benefit of EPF
The employees enjoy numerous tax benefits with the employee provident fund. Here are some of the tax benefits of EPF:
- Employer’s contribution to your EPF account is tax-free. This exemption is subject to 12% of your basic pay along with the Dearness Allowance.
- The interest on employer’s contribution is exempted from tax.
- The employee contribution toward EPF is eligible for tax deduction under section 80C.
- The interest on the employee’s contribution is also exempted from the tax.
In case if the employee does not complete the minimum investment requirement of 5 years, the above tax exemption and deduction availed by you would be void.
Steps to calculate tax on PF withdrawals:
The tax payment on premature EPF Withdrawals is not an easy task. It comprises of all those years during which you have availed the tax benefits. In order to pay the tax on PF withdrawals, you need to follow the simple steps provided below:
- Download the PF passbook from the UAN member portal. Add all the contributions you have made separately for every financial year.
- Now add up the employee contribution by exempting the interest part
- Also, add the contribution made by the employer by exempting the interest. Add the pension contributions too.
- Choose the interest on employee contribution for a year. Then deduct the interest of the previous financial year from the current financial year.
- In the same way, calculate the interest on the employer’s contribution.
- Now open the official web portal of income tax e-filing. And select the current financial year to revise your income tax return.
- Increase your taxable income by the employer’s EPF contribution and through the interest you have earned in the year.
- Enter the interest on employer’s contribution in the other column of income.
- Deduct the employee contribution from the total investment amount of 80C. And now your 80C investment will be reduced.
Repeat the above steps for every financial year and check the taxable amount before return submission. Pay the income tax and get the challan NO. Enter the total amount of tax paid and submit the revised return for every financial year.
TDS on EPF
The Tax Deducted at Source Rule of Provident Fund is more excruciating. The total deduction amount of TDS is upto the rate of 34.6% which is considered to be the maximum marginal rate of the income tax. Most of the people think that 34.6% tax is huge, that too of EPF corpus. It would be really very frustrating, if you get EPF amount after such a massive deduction.
Terms and Conditions of TDS on EPF Withdrawal
The EPFO can deduct TDS only if an employee comes under these two different criteria.
- If the employee has not completed a total of 5 years of continuous service.
- If the EPF Withdrawal amount is greater than Rs.50,000. Previously this limit was Rs.30, 000.
No TDS on PF withdrawal (before 5 years) in following conditions:
- If the Provident fund amount is just transferred from one PF account to another account.
- If PF amount is less than Rs. 50,000/-
- If PF amount is more than or equal to 50,000 but he/she submits Form 15G/15H and PAN
- If employee is terminated from service due to closure of company by employer / completion of project / medical reasons / other conditions beyond the employee’s control
Tax Deduction for withdrawal before 5 years:
- If PAN is submitted but Form 15G/15H is not submitted, then Tax on PF withdrawals will be @ 10% (only for amount equal to or more than Rs. 50,000)
- If no PAN is submitted, tax on PF withdrawals will be @ 34.608%
How to avoid tax on PF Withdrawals?
Hope now you are aware that early PF withdrawal can leave you in a heavy tax burden. Besides this, there are other difficulties as well. But if you plan accurately, you can avoid the tax and hassle both. Here is a way to avoid tax on PF Withdrawals:
- Never try to withdraw the EPF amount after every job hopping. Due to this, you might pay tax after every withdrawal. The PF transfer will save you from income tax burden.
- If you are looking to take a small break from your job, don’t withdraw your EPF amount. Instead you can transfer the EPF balance, once you join the new service. A PF Account provides interest till three years of non-contribution.
- If you are leaving a job completely and switching to a new business or profession. In such a case, you can wait for the completion of five years. Often, people don’t consider this fact when tendering the resignation.
How to avoid TDS on your EPF?
It is not always possible to avoid tax on EPF. For instance, the employee might have some kind of compulsion to leave the job before 5 years. This suggests that the employee must pay the tax on PF Withdrawals. However, the tax on Employees Provident Fund will be less than 10% of the EPF amount. And TDS will be a minimum of upto 10%. In such cases, there is a possibility to avoid TDS.
To avoid TDS on your EPF, you must fill the form 15H or form 15G. These forms are the declaration of non-taxability. Usually, the form 15G is widely used by the common public to avoid TDS. While on the other hand, the form 15H is used by the senior citizens.
Thus, we have tried our best to provide all information that will help the pensioners and employees to know about the tax benefits, taxation rules, process of avoiding TDS on EPF and tax on EPF.