Tax Deducted at Source: Why TDS has been deducted on my EPF?

Last Updated at: November 08, 2019
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Tax Deducted at Source: Why TDS has been deducted on my EPF?

Employee Provident Fund is an important amenity provided by companies and remains, without a doubt, the favourite product of employees. At the same time, no employee enjoys it when a tax deduction is made on the EPF leading to them getting less than what they want. Both the individual in question and the employer have to pay a portion of it, and together it contributes to this fund. 

Here’s a look at how TDS is deducted from your EPF and how you can save up by reducing the tax that gets deducted from it.  

What is TDS?

TDS or Tax Deducted at Source is a tax that is deducted from a person while paying for rent, interest, professional fees, etc. TDS can be taxed while withdrawing EPF amount. 

TDS on EPF 

An EPF is usually stored for a period of five years. When the amount is withdrawn before this time period, then the TDS is deducted from it. The five years is calculated, including your period with a previous employer or firm. Transferring your EPF from an old firm to your new firm will lead to a continuation of the time frame, and the EPF does not get broken in such a case. If after such a transfer, a period of five years is completed, then on withdrawing from it does not lead to a tax deduction. 

Temporary employment

Another major issue with regards to TDS comes if you are a temporary employee who hasn’t been employed for longer than five years. Temporary employees or ones who have been hired on contract for short durations of time often find it difficult to avoid a TDS deduction. Not being a permanent employee hampers your chances of getting a tax saving or tax benefit.  When you are not listed as a permanent employee on their rolls, the firm or company is not liable to pay your share of the EPF and hence that makes you ineligible to avail tax benefits. Once your contract wears out, the employer adds you to the rolls and starts contributing to your EPF. Later, when you resign thinking you have completed five years, you forget that this amount also includes the time wherein you were not on the employee records, and hence you get penalised by TDS.

E-file Your Income Tax Returns

Taxation on withdrawals

Every EPF payout is comprised of four major parts. 

  1. Individual contribution 
  2. Interest on that contribution
  3. Employer’s contribution
  4. Interest on their (employer’s) contribution

Employee’s contribution is the amount you contribute towards your EPF and is hence not taxable. But if you have avoided tax deduction as per section 80C, then you will have to pay some additional taxes to make up for it. 

The interest your contribution provides is taxed as Income from Other Sources.

Employer’s contribution and the interest we gain on it are fully taxable as per the Income Tax laws. This falls under the head salary category and when TDS is deducted from this, you will see it under the Form 26AS section.

When does TDS happen?

  1. TDS will be deducted at 10% on your EPF balance when you withdraw a sum of Rs 30,000 before five years of service
  2. You need to mention your PAN details at the time of withdrawal. TDS will be deducted at the maximum marginal rate of 34.6% if you fail to submit your PAN during the time of withdrawal.

When does no TDS deduction happen?

  1. When you transfer PF amount from one account to another
  2. When you quit your job due to illness, or other reasons
  3. When PF is withdrawn after a period of five years
  4. If the PF payment is less than Rs 30,000 and you were employed for a period of less than five years. 
  5. If you withdraw PF of Rs 30,000 or more with less than 5 years of service and submit Form 15G/15H along with PAN. 

Forms

  • Both Form 15G and 15H are accepted in duplicate and work as self-attested copies that prove the employee’s authenticity.
  • Form 15G is used by people who do not have any other taxable income, and whose interest received from sources also falls under the minimum requirement. It does not work for NRIs. Meanwhile, Form 15H is designed for individuals above the age of 60.
  • Both do not work when your withdrawal exceeds 2,50,000 INR.

Refund

If you earn less than INR 2,50,000 annually, you may claim for a TDS refund. All you need to do is to project your withdrawal as a salary income while filing your IT returns.

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