EPF Withdrawal |Rules | TDS | Job Change | Transfer | Exemptions | Lock-In Period
Earning money is difficult but, watching taxes making a dent on your hard earned money is painful. There are different taxes you need to pay and these include income tax, professional tax and more. However, when taxes are applied on EPF, the situation becomes really difficult to digest. Irony is that you cannot do anything about it. All you have to do is to just pay the taxes that are being levied on your accrued EPF. The problem with EPF is that you really don’t have direct access to this income source, making it more vulnerable to Income Tax department.
So, act smart and go through this article in details to learn methods that can help you avoid taxes and at the same time, help you learn the possible methods of saving on TDS deductions. So, if you are ready, let us begin!
Concept About EPF
Usually people conceptualize EPF or Employees Provident Fund as tax-free retirement corpus. Simply put, a service holder looks at EPF as his or her bulk pension after retirement and that the pension amount will not be taxed.
The notion that EPF is totally tax-free is a myth.
Hardly any of us really know that EPF can come under taxation and this taxation can actually eat up a major chunk of the EPF balance that one is supposed to get after retirement. The question is, ‘just how much of the EPF can be taken away as tax?’ That’s pretty big a portion you know. Embrace yourself for a big shock! The amount of portion that can be taken off your EPF balance is a stunning 34.6%.
Now the next logical question is, ‘what kind of tax is applied that eats off 34.6% of the totals EPF money?’ Well, we call it Tax Deduction at Source or simply put TDS.
Now that we know TDS is a culprit, the question that follows is, ‘why will government apply TDS on EPF money?’
People change jobs, right? Well, most of the people who jump from one job to another usually resort to withdrawing the EPF balance from Provident Fund account instead of simply transferring the EPF account from one company to another company. This tendency of withdrawing EPF is what makes subjects it to taxation. When EPF is withdrawn while switching between jobs, it is known as premature withdrawal of EPF and that is where the government levies taxes.
So, there are no EPF tax exemptions at all?
Of course there are tax exemptions and these exemptions differ for different types of provident funds.
Wait! What? Different types of provident funds?
Yes… you read it right. There are different types of provident funds and there are there are different types of tax exemptions. The official website of Income Tax Department gives a very comprehensive table summing up the different taxation rules for these different provident funds. Let us take a look at the table. But remember, we will be changing the format of the table to avoid copyright issues and further simplify the explanations. Here is the tabular representation:
|Fund Types and Taxation Rules||Contribution from the Employer||Contribution of Employee Eligible for Tax Exemptions U/S 80C||Tax on Interest Earned by the Fund||Tax on Final Amount Withdrawn from Fund When Service Ends.|
|Statutory Provident Fund||Not taxable||Tax Exemptions Available U/S 80C||Tax-free||Tax-free|
|Recognized Provident Fund||Tax-free up to 12% of the salary paid*||Tax Exemptions Available U/S 80C||Tax-free up to interest rate of 9.5%. Taxable if interest rate exceeds 9.5% (applicable to the contribution that is made by both employee and employer)||Tax-free provided some conditions are met|
|Unrecognized Provident Fund||Tax-free||Tax Exemptions NOT available U/S 80C||Tax-free||Tax-free provided some conditions are met|
|Public Provident Fund||No contributions are made from the employers’ end and hence, question of tax is out of the books||Tax Exemptions Available U/S 80C||Tax-free||Tax-free|
* Salary is calculated by including basic salary, dearness allowance and yearly commission received by the employee as a fixed percentage of yearly turnover of the company.
In the above table, Recognized Provident Fund is actually Employees Provident Fund or EPF. If you notice carefully, there are quite some catches in the taxation rules applied to EPF. Here is a quick summary:
- The amount that the employer contributes towards EPF (some companies may call it CPF or contributory provident fund) is not at all taxed as long as such contributions do not exceed 12% of the salary of an employee. However, if the contribution is above 12%, anything over and above 12% will be taxed.
- EPF is made up of employer’s and employee’s contribution. The total amount then earns interest. The interest earned by the portion of the money contributed by the employer will not be taxable as long as yearly interest does not exceed 9.5% mark. The same applies for the interest earned on the amount invested by the employee.
- Whatever amount the employee is investing towards EPF is exempted from taxation under section 80C of Income Tax Law.
The Catch of EPF Lock-In Period or Minimum Service
As we mentioned before, people have this habit of withdrawing EPF once they change their jobs. Some people are excellent job-hoppers and they kind of keep jumping from one job to another almost every year in search of better opportunities. While it is true that hopping from one job to another can help a person land with a better pay scale, there are some problems:
- Companies don’t prefer attrition and really don’t like to hire people who quickly change jobs. This habit actually shows unreliability of the employee.
- From EPF point of view, hopping jobs and withdrawing the EPF every time a job switch takes place, taxes come in hot and red!
What does that mean?
Well, investments in EPF are subject to tax exemptions just like any tax-saving investments. However, exemptions U/S 80C explicitly call for a minimum lock-in period of 5 years with the exception of ELSS. EPF is no exception. For EPF investments to earn the 80C tax exemptions, a person needs to ensure that the investments are kept locked in the EPF fund for a period of 5 years minimum.
Putting in other words, the person has to stay in job for a minimum of 5 years. It is immaterial whether he or she stays in a single company or frequently changes jobs. He or she needs to ensure that the EPF is not withdrawn until 5 years of service is completed in total. So, the only option left is to transfer the EPF account from one company to another if the person is switching between jobs frequently.
Failure to do so will attract income tax every time the EPF is withdrawn and income tax filing for every pervious year when EPF was withdrawn becomes imperative.
New EPF Rules That Will Kill All Tax Benefits
As mentioned above, minimum 5 years of lock-in period is required for EPF to enjoy tax benefits. In case a person decides to withdraw EPF before completion of 5 years, all tax benefits enjoyed by the person will simply vanish. Here are some of the harsh rules you need to keep in mind:
- Under new rules of EPF (released on February 10, 2016), the contribution made by the employer and also the interest earned on the contributions made by the employer cannot be withdrawn until the locking period is completed.
- Whatever tax benefits were earned by the employee on his or her contribution towards EPF will have to be returned completely.
- Interest that is earned on the contribution amount of the employee will no longer remain tax-free and will be considered as ‘other income’. This income will be taxed normally depending on the tax slab in which he or she falls in.
In addition to all these hassles for premature EPF withdrawal, a person will also have to file revised IT returns for all previous years because tax benefits that are to be returned or interest that becomes taxable on premature withdrawal are all calculated every financial year and hence, all previous IT returns will become meaningless and have to be redone!
How to Calculate and Pay Tax on EPF for Premature Withdrawal?
If you really decide to withdraw EPF prematurely, all tax benefits are to be returned and all new taxes on the interest earning are to be paid by excluding the share of the employer (which has to be left behind). This will be a real herculean task because it will require some manual labor.
Before you can even start the whole process, you will need to grab you PF passbook, which can be downloaded from official website. Remember that you will need your universal PF number to be able to do so. Once you have the PF passbook, you will see something like this:
|Particulars||PF Contribution||Pension Contribution|
|Employee Share||Employer Share||Employee Share||Employer Share|
|Interest Updated up to 31/03/2014||12704||8589||0|
|Cont. for 042014||2730||2189||541|
|Cont. for 052014||2730||2189||541|
|Cont. for 062014||2730||2189||541|
|Cont. for 072014||2730||2189||541|
|Cont. for 082014||3234||2693||541|
|Cont. for 092014||3234||2693||541|
|Cont. for 102014||3234||2693||541|
|Cont. for 112014||3234||2693||541|
|Cont. for 122014||3234||2693||541|
|Cont. for 012015||3234||2693||541|
|Cont. for 022015||3234||2693||541|
|Cont. for 032015||3234||2693||541|
|Interest Updated up to 31/03/2015||14878||10429||0|
Keep your calculator ready and start the following steps:
- Add all the contributions you made towards EPF for each fiscal year. Do not include the interest earnings.
- Add all the contributions your employer made towards EPF for each fiscal year. Do not include the interest earnings.
- Add all the contributions your employer made towards pension funds.
- Add the interests earned by your contributions for each fiscal year separately. Now subtract the interest earning for the previous fiscal year from the current fiscal (in which you are making the withdrawal). As per our above example table, it will be INR 14878 – INR 12704 = INR 2174.
- Repeat step 4 but this time with the interest earned from the contributions made by the employer. For above example it will be: INR 10429 – INR 8589 = INR 1840.
- Once you have the above data, head for e-filing portal of Income Tax. You need to revise your income tax filing for previous years too. So you need to select a financial year and revise it. For example, if you are revising for 2014, you need to redo steps 4 and 5 using years 2014 and 2013. If you are revising for 2013, you need to redo steps 4 and 5 using years 2013 and 2012.
- Once you select the year for which you need to revise the income tax filing, you need to increase the taxable income. This will be the EPF contribution of the employer for the year in question plus interest earned by contributions made by the employer.
- You can find a column called other income. You need to fill in the interest you earned for that year from your contributions to EPF. So, if you are revising it for 2015, your other income will be, as per the above example, INR 2174.
- There will be a section where you need to deduct your share of EPF contribution for the year from total 80C investment amount.
Once you follow all the 9 steps, you will be shown the amount of tax you need to pay. Pay it by following the steps that show up and collect your challan. You have to do these steps for every individual year prior to the year of your premature EPF withdrawal.
TDS Deductions on EPF Withdrawals Before Lock-In Period is Over
New rules for TDS deductions on premature EPF withdrawals are extremely strict. The maximum TDS that can be deducted under the new rules if 34.6%. This is a huge amount. However, TDS will be deducted only if one of the following two criteria are fulfilled:
- You failed to complete 5 continuous years of service.
- You are withdrawing excess of INR 50,000 as EPF fund.
You satisfy one and TDS will be applied immediately.
What really is continuous service?
Good question! See continuous service means you have to stay employed for 5 consecutive years without fail. It is however not necessary that you have to stay employed in the same company. You can actually change jobs. The only thing you need to do is just transfer your EPF from your previous organization to your current organization. How long you served in a single company will not be considered for calculating continuous service period. It is just that staying employed is IMPORTANT. If you don’t transfer your EPF account to the new company when switching jobs, the service period with the previous organization will not be included in the calculation of continuous service period.
Here is a quick chart that will tell you when TDS will be applied and when it will not be applied:
Explanation of TDS Rules Based on Above Chart
From the above chart we can see the following scenarios:
- You are withdrawing EPF of less than INR 50,000 – NO TDS will be applied.
- You are withdrawing EPF of more than INR 50,000 – TDS may or may not be applied.
In case you are withdrawing EPF of more than INR 50,000, EPFO will see whether you have completed 5 years of continuous service or not.
- If 5 years of continuous service is completed then, you can withdraw without any TDS deductions.
- If 5 years of continuous service is not completed then, EPFO will check whether you have given your PAN details or not.
Depending on whether you have furnished your PAN details or not, two scenarios can happen:
- PAN details not provided – TDS will be applied at the rate of 34.6%.
- PAN details provided – EPFO will check whether you have submitted form 15G and 15H or not.
Depending on whether you have submitted 15G and 15H, two situations can happen:
- You have not submitted 15G and 15H – TDS will be applied at the rate of 10%.
- If 15G and 15H are submitted – NO TDS will be deducted.
- PAN details are usually submitted by the employer.
- You will have to submit 15G or 15H depending on your age. Both are not required.
- 15G and 15H are self-declarations where you need to declare that the total income you have (which also includes your whole EPF earnings) is below taxable limit. If there are discrepancies in what you declare and what really the case is, you may be subject to penalties. So, make sure that you are honest while giving these declarations.
Conditions Under Which TDS Rules Don’t Apply
Well, TDS rules are really strict but there are exceptions where TDS rules do not apply at all. These exceptions include:
- Your service ended for some reason that you are not in control of.
- You are no longer in service because there is a company lockout.
- You are no longer in service because of a serious medical condition.
- You are no longer in service because the company laid off some employees for some reason or other such as economic depression.
What is the Justification for EPF TDS?
You may find that TDS deductions are not justified. Hold on! The rules for tax deductions have always existed. Only previously, you were in charge of paying your taxes if you prematurely withdrew your EPF money. The only change that has happened now is that government has clearly asked EPFO to deduct taxes before the EPF is released in case of premature withdrawal. This is tax deduction at source or TDS. Introduction of TDS has only ensured that government’s tax revenues not just keep flowing properly but increase. Earlier it happened that most people simply didn’t pay taxes on their own after prematurely withdrawing EPF and government had to lose crores of rupees of tax revenue, leading to government budget deficits.
You need to remember that if for some reason you think EPFO has deducted excess TDS, you can claim it back provided you actually provide proper proof that you are not eligible for such deductions.
Is TDS Different from Other Tax Deductions?
Before we started with TDS, we explained how to calculate your taxes in the event of premature withdrawal of EPF. That’s income tax and that rule had always existed. TDS is different from income tax applicable in case of premature withdrawal. TDS is extra addition made by government. Irony is that TDS is a part of income tax. So yes, introduction of TDS means that you are actually paying more income tax in case of premature withdrawal of EPF than previous arrangements of income tax but no TDS.
What Can You Do to Avoid Tax On EPF Withdrawals?
When we are saying Tax on EPF withdrawals, we are not referring to TDS. It is the normal income tax that one had to pay before TDS was added to the platter. Here are a few simple things you need to follow:
- Don’t withdraw prematurely if you are switching jobs. Transfer your EPF account from one company to another.
- If you are going out of service for a small period of time and intend to get back later, do not withdraw your EPF. Let it sit and earn interest. EPF funds will continue earning interest for 3 years after your stop contributing to the fund.
- If you are permanently quitting your job and replacing it with business, let your EPF sit and reach maturity of 5 years and then withdraw.
What Can You Do to Avoid TDS on Premature EPF Withdrawal?
- Make sure PAN details are provided.
- Make sure that you fill 15G or 15H. 15H is for senior citizens and hence, you can just submit 15G.
Depending upon whether you have submitted your PAN and 15G, your TDS deductions can vary between 34.6%, 10% or No TDS at all! So, check out the options before you withdraw your EPF money before 5 years of continuous service is completed.