TDS on PF Withdrawals

Understand the rules of TDS on PF withdrawals and how to save on taxes.
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TDS on PF Withdrawals
OPEN FD
3 min
15-November-2024

The Employees' Provident Fund (EPF) is a valuable retirement savings scheme in India. However, if you withdraw your EPF balance before completing a certain period of service, it may be subject to Tax Deducted at Source (TDS). Understanding how TDS works on EPF withdrawals is crucial for planning your finances and avoiding unexpected tax burdens.

What is TDS?

Tax Deducted at Source (TDS) is a system in which the income tax department mandates the direct deduction of tax from certain income sources, including salaries, interest on fixed deposit, and even EPF withdrawals in specific cases. This mechanism ensures timely tax collection and eases the tax-paying process for individuals.

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Why TDS matters?

TDS is a crucial mechanism in India's income tax system for several reasons:

  • Ensures tax collection: The government deducts tax at the point when income is earned, such as with your salary or interest payments. This prevents tax evasion and ensures a steady flow of revenue for the government.
  • Widens the tax base: TDS helps bring more people into the tax system. Even if someone doesn't file a formal return, TDS makes sure they've contributed some tax throughout the year.
  • Convenient for taxpayers: TDS simplifies tax payment for individuals. Instead of a large lump sum at year-end, taxes are paid in smaller amounts throughout the year.
  • Transparency & accountability: TDS help in create a clear record of income and tax deductions. This improves transparency for both the government and taxpayers.

EPF withdrawal eligibility

  • Unemployment: Being unemployed for over two months makes you eligible to withdraw your EPF.
  • Change of job: If you switch your job and are unemployed for two months then you can withdraw your EPF balance.
  • Medical emergency: In case of a medical emergency, you can withdraw from your EPF account.
  • Home loan repayment: You can withdraw your EPF funds to make payment towards your home loan.

Taxability of EPF withdrawals

The taxability of your EPF withdrawal depends on the following factors:

  • Duration of service: If you withdraw your EPF balance after completing five years of continuous service, the withdrawal is entirely tax-free. However, if you withdraw before this period, tax may be applicable.
  • Amount withdrawn: Withdrawals under Rs. 50,000 are generally not subject to tax, regardless of your service length. However, amounts exceeding Rs. 50,000 can be taxed if you haven't completed five years of service.
  • Tax Deducted at Source (TDS): TDS on EPF withdrawals is deducted at 10% if you have provided your PAN. If you fail to furnish your PAN, the TDS rate is significantly higher at 30%.

Note: Tax laws and TDS rates can change, so it is crucial to stay updated.

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Table on taxability on withdrawal of EPF

Scenario

Taxability

Withdrawal under Rs. 50,000 before 5 years of service

No TDS, but taxable if your income falls within taxable brackets.

Withdrawal over Rs. 50,000 before 5 years of service

10 % TDS will be charged

Withdrawal after 5 years of continuous service

No TDS, exempt from income tax.

Transfer of PF when switching jobs

No TDS

Withdrawal before 5 years due medical emergency

No TDS, exempt from income tax.


Rate of TDS deduction

  • If you withdraw your EPF balance before 5 years of service and the amount exceeds Rs. 50,000, a 10% TDS will be deducted.

Note: If you don't have a PAN card, a 20% TDS will be charged.

  • If your total income, including the EPF withdrawal, is still below the taxable limit, you can avoid TDS by submitting Form 15G/Form 15H.

Also read: What is provident fund

How to avoid TDS on EPF withdrawal?

  • When switching jobs, avoid withdrawing your EPF balance. Instead, transfer it to your new employer's account. This helps maintain service continuity, potentially leading to no TDS after five years of combined service.
  • Generally, no TDS is deducted on EPF withdrawals if completed 5 years of continuous service, including service with previous employers.
  • If your EPF withdrawal amount is less than Rs. 50,000, no TDS is applied regardless of your service period.

Remember, these strategies may not eliminate potential tax liability entirely. Depending on your income tax bracket and other factors, you might still need to pay tax on your withdrawal when filing your return.

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Conclusion

Understanding TDS on PF withdrawals allows you to make informed financial decisions regarding your retirement savings. Be mindful of the rules, provide your PAN, and consider submitting Form 15G/15H when applicable to minimise your tax burden. 

Frequently asked questions

Is there any TDS on PF withdrawal?

Yes, Tax Deducted at Source (TDS) is applicable on PF withdrawals if the amount exceeds Rs. 50,000 and the employee has not completed five years of continuous service.

Is 15G compulsory for PF withdrawal?

Form 15G is not compulsory but can be submitted to avoid TDS if the total income is below the taxable limit. This form is applicable only for individuals below 60 years of age.

What is the TDS rate for PF withdrawal?

If you withdraw your EPF balance before completing 5 years of service and the amount exceeds Rs. 50,000, a TDS of 10% will be deducted. However, if you provide your PAN at the time of withdrawal, the TDS rate will be 10%. If you fail to provide your PAN, a higher TDS rate of 20% will be applicable.

What are tax benefits available for the member employee under the Scheme?

According to Indian Income Tax laws, certain tax deductions apply to EPF withdrawals, allowing for tax-free returns under specific conditions.

For withdrawals exceeding Rs. 50,000 before completing 5 years of EPF account tenure:

  • With PAN: A 10% TDS will be applied.
  • Without PAN: A higher TDS rate of 34.6% will be imposed.

For withdrawals exceeding Rs. 50,000 after completing 5 years of EPF account tenure:

  • No tax will be levied.

For withdrawals below Rs. 50,000:

  • Regardless of the time of withdrawal, no tax will be applied.

In cases of termination or unemployment due to ill-health:

  • Withdrawals will be tax-exempt.

It's important to note that these tax regulations are specific to India and may not apply to other countries.

Is EPF transfer or withdrawal taxable?

According to the current Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, any income received from an EPF withdrawal before completing five years of continuous employment is considered taxable.

However, there are exceptions to this rule:

  • Ill-health or business closure: If employment termination is due to ill health or business closure, the withdrawal is tax-exempt.
  • Transfer to a new employer: When EPF balances are transferred to a new employer, they remain tax-exempt as they are considered a continuation of the existing account.
Is there a minimum number of years that must be rendered for partial withdrawals in case of medical treatment?

To avail of medical withdrawals from your EPF account, you do not need to meet a minimum service period requirement. You can withdraw funds for medical reasons at any time, provided the expenses are for yourself or your family. The hospitalization must be for a period exceeding one month due to a major surgery, illness, or physical disability. The maximum withdrawal amount is limited to six months' worth of your PF contributions.

Can a person withdraw the EPF amount one year before retirement?

If an employee reaches the age of 54 or older, they can withdraw up to 90% of their PF balance, including interest, one year prior to their retirement date.

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