Is Provident Fund Withdrawal Taxable In India?

In this article we will take a look at the consequences of withdrawing funds from the provident fund scheme account from a tax perspective.

Introduction

It is very important for an economy to ensure that its workforce is self-sufficient post retirement so as to ensure that there is no additional strain on the financial resources dedicated to its active workforce. Different countries have different ways of tackling this hurdle in long term economic planning. In the western countries, the government compulsorily takes a sizable portion of the working population’s income in the form of taxes and sets aside a portion of it for the retirement of the taxpayer. This is commonly known as ‘Social Security’. However, in India, we do not have this system due to several logistical problems, the most glaring of them being the sheer size of the population. There is no effective system in place. And so, the most viable option to ensure that the retired class of the population is self-sufficient is to incentivise them in some way to make contributions in investment schemes that will reap dividends during their retirement, hence ensuring that they are able to meet their cost of living expenses. Let’s know if provident fund withdrawal taxable in India in this article.

Provident Fund is most likely the best investment scheme for retirement benefits in India. It is low on risk and gives ensured returns. Allowing regular periodical contributions towards the EPF account as deductions from taxable income under Section 80C of the Income Tax Act is the incentive. EPF accounts are covered under a government scheme and overseen by the Employees’ Provident Fund Organization (EPFO). The plan was set up in 1952 and was at first formed to offer the industrial worker a steady pay after retirement. The arrangement was later expanded to every single salaried individual.The government furthermore ordered that all organizations having more than 20 workers are mandatorily required to subscribe to the scheme. Over a period of time, retirement fund body EPFO has made the procedure of withdrawing funds from the employee provident fund account more easier. Presently, an EPFO member can submit an application for EPF withdrawal online and within a very period of time, the funds will be credited to the account. However, financial advisers don’t recommend early withdrawal of the EPF amount, as they state, is intended for post-retirement years. Therefore, to restrain early and reckless withdrawal, the legislature has planned income tax laws that tax premature withdrawals from EPF.

However, under certain circumstances the premature withdrawal of PF funds has been permitted without suffering taxation. The EPFO has made a few changes to permit withdrawal of the EPF amount up to 75% of the aggregate during periods of unemployment. The individual can also withdraw the remaining 25% in the event of being unemployed for over two months.

How Does An EPF Account Work?

Under the EPF Act, an employee is required to contribute 12% of his/her monthly income to the EPF account. An identical sum is contributed to the account by the employer. The amount amassed in a worker’s PF account likewise gains interest through the course of the person’s service. As of now, the rate of interest on EPF accounts is 8.55% annually. An EPF account holder ideally is expected to withdraw their EPF amount on retirement. On the other hand, individuals can also withdraw the sum in specific situations such as medical treatment, financial support in marriage preparations, buying a new house, etc.

Income Tax On PF Withdrawal

Now let’s discuss how and when EPF withdrawal is taxable:

• EPF withdrawal is assessable if a representative does not render ceaseless administrations for a time of no less than five years.
• If there is a situation of a job change within five years, and if EPF account is transferred to another company’s name, the new company owner’s period of work is likewise included to ascertain the consistent period.
• If the complete time of service is under five years, the aggregated EPF balance pulled back ends up taxable in the budgetary year of withdrawal.
• It is to be noticed that there are four sections to any EPF commitment – employee’s subscription, business subscription and premium earned from both employers and worker’s subscription.
• If the time of consistent employment is under five years, the summation amount of the business’ commitment to EPF and premium earned on it is taxable under the head “salary” in the employee’s income tax return.
• The individual’s own contribution part of the withdrawal isn’t taxable. However, if the subscriber had asserted concluding under Section 80C on his commitment in prior years, it winds up taxable underpay. It is to be noticed that the EPF payer’s very own contribution towards EPF is qualified for conclusion under Section 80C of the Income Tax Act.
• The premium received on the EPF payer’s own contribution part is tariff under ‘salary from different sources’.
• On pulling out the EPF amount before five years of employment, TDS or duty deducted at source at 10% is charged.
• However in a couple of cases, for example, if a sum is not exactly Rs.50,000 or the employer shutting down the company, TDS isn’t charged.
• If the sum is more than Rs.50,000, and duration of employment service is under five years, the supporter can submit Form 15G or 15H to stay away from TDS in situations where the pay for that year is much lesser than a taxable amount. Form 15H is for senior residents (60 years or more) and Form 15G is for people having no taxable salary.

Conclusion – Is Provident Fund Withdrawal Taxable in India?

Taxation on the face of it seems like a giant ball of confusion which seems illogical and unpleasant. But what we need to understand is that taxation policies are formed taking into account the overall interest of the national economy which in turn is meant to benefit us in a holistic manner in the long run. We may not have the full picture on a macro-economic level and hence tend to have an aversion towards the rules and provisions of the taxation system. However, whenever you are engaging in any kind of financial transaction that is out of the ordinary, it is always advisable to seek the advice of a financial or taxation specialist who will be able to explain to you the financial and tax related consequences of your proposed action. If you require any help with any tax related matter or need assistance with any compliances, get in touch with our team of experts and they will be happy to assist you to the best of their abilities.

Also, Read:

• How to fill form 15h for pf withdrawal?
• How to claim the final settlement using PF Withdrawal Form 19?
• How to update PF nominee on EPFO portal?