Employee Provident Fund (EPF) is a retirement savings scheme for employees, offering tax benefits during the contribution phase. However, when it comes to withdrawing the accumulated EPF amount, certain tax implications arise based on the timing, purpose, and duration of employment.
Understanding the tax treatment on EPF withdrawals is essential to avoid unexpected liabilities, as withdrawals before completing five years of continuous service may attract tax, whereas withdrawals after five years are largely tax-exempt.
In this piece, we will look at the detailed tax understanding of EPF from interest to withdrawals to help you plan efficiently.
Interest on EPF: Following the amendment made by The Finance Act 2021, any interest to the extent it relates to the amount of EPF contribution exceeding Rs 2.5 lakh by employees would be subjected to taxation.
“In case the employee is solely making contributions to the Provident Fund without any contribution by the employer, such threshold limit of Rs 2.5 lakh would be increased to Rs 5 lakh,” said CA (Dr.) Suresh Surana. Thus, any interest derived from contributions exceeding such threshold limit of Rs 2.5 lakh and Rs 5 lakh would be taxable in the hands of the employee under the head ‘Income from Other Sources’. Further, any interest earned on such contribution in excess of 9.5% p.a. will be taxable as well.
Employer’s contribution: Employer’s contribution upto 12% of the salary is exempt from tax. “However, an employer’s contribution exceeding Rs 7.5 lakh to PF including EPF, superannuation fund and NPS on an aggregate basis will be taxable in the hands of an employee. Such contribution in excess of the threshold limit of Rs 7.5 lakh would be taxable as perquisite u/s 17(2) (ia) r.w. Rule 3B of the Income Tax Rules,” said Surana.
Employee’s contribution: The contribution made by the employee is allowed as a deduction u/s 80C of the Income Tax Act, 1961 subject to the limit of Rs 1.5 lakh.
Lump sum amount: The lump sum amount received from the EPF by the employee would be exempt in his hands u/s 10(12) of the Income Tax Act, 1961 provided the employee has completed 5 years or more of continuous service. However, certain relaxations have been provided in the following cases:-
(i) the service has been terminated by reason of the employee’s ill-health, or
(ii) by the contraction or discontinuance of the employer’s business or other cause beyond the control of the employee,
(iii) the employee obtains employment with any other employer and his balance in EPF is transferred to the new employer.
Applicability of TDS u/s 192A: “TDS will be deducted in case where employee withdraws an amount more than or equal to Rs 50,000, with service less than 5 years, then TDS will be deducted @10% if Form-15G/15H is not submitted and provided PAN is submitted. TDS will be deducted @Maximum Marginal rate (i.e. 39%) if the employee fails to submit PAN,” said Surana.
