Executive Summary: Amount withdrawn from EPF account is subject to tax if this is done before completion of 5 years of continuous employment. In case the PF balance is taxable, the amount which was contributed by the employer (including the interest earned thereon) will be taxed as Salary income, interest on employee’s contribution will be taxed as income from other sources, while the tax benefits enjoyed earlier under Sec 80C will now be withdrawn.
Technically, the EPF amount can be withdrawn only if one is out of job. The regulations need that there is a waiting period of at least 2 months from the last employment, before the withdrawal can be requested. The withdrawal of PF is governed by the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
Any amount withdrawn from the EPF account is taxable if the withdrawal is made before completion of 5 years of continuous service. The critical points to note here is the time period of 5 years, and also that there should be continuity in employment. If the employee has transferred jobs, then the period of employment with the new employer will also be reckoned for calculating the 5 year period. However, this is possible only if the employee has transferred the EPF amount from the old employer to the new employer. The ‘5 year continuous service’ clause need not be satisfied if the employer has discontinued his business, if the employee has been terminated due to ill health or if the reasons are beyond the employee’s control.
In case the employee has withdrawn the PF amount before the period of 5 years of continuous employment, the amount withdrawn is taxable in the year of receipt as under:
- The employer’s contribution will be taxed under as ‘Income from Salary’, along with the interest earned on it.
- Interest on the employee’s contribution will be taxed as ‘Income from Other Sources’.
- The tax benefits claimed earlier under Sec 80C will now be reversed and will be taxable.
It should be noted that the tax rate applicable will depend on the income slab of the employee in each of the years during which the PF contribution was made. The amount withdrawn is therefore subject to tax, along with the surcharge and cess applicable thereon.
As the amount which is to be paid as tax on withdrawal of PF can be quite substantial, it is recommended to transfer the PF balance when shifting jobs. This is not only beneficial from the tax perspective, but also gives the balance, the benefit of compounding. With the EPFO taking steps to ease transfers and tracking of PF balances online, this process is expected to become faster and more efficient in the coming years.
Disclaimer: The above is a general interpretation. You may need to hire a Chartered Accountant (CA) for your specific situation.
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