Pf withdrawal tax: Employees Provident Fund (EPF) is considered the most powerful scheme for retirement in India. With this, more than 7 crore members are connected across the country. It is looked after by the Employees Provident Fund Organization (EPFO), which is a legal body of the Government of India.
Both employees and employers contribute regularly under the EPF scheme. But it is important to know when and how these contributions and interest are taxed. Also, clear rules have been set for how tax can be avoided on the withdrawal of EPF.
When does PF get tax exemption?
According to EPFO, it is mandatory for any provident fund account to be recognized by the Income Tax Department. Only recognized provident funds get tax exemption and other benefits under the Income Tax Act, 1961.
How is tax on employer’s contribution?
Under the EPF rules, the employee deposits 12% of his basic salary and dearness allowance (DA) in PF. The same contribution has to be made to the employer or his company or organization.
If the contribution of the employer is more than 12%, the additional amount is added to the employee’s income and tax is levied. Also, if the employer’s annual contribution is more than ₹ 7.5 lakh, then it will be considered a perquisite i.e. other benefits to the employee other than salary. Then he will be taxed on the employee according to the tax slab.
The employer also gets relief in income tax. He can get a tax exemption by reducing his income by up to 12% of his contribution.
How does the employee contribute tax relief?
Employees can get a discount of up to ₹ 1.5 lakh on their contribution to EPF. This exemption is available under section 80C of the Income Tax Act. However, only the employees who choose Old Tax Rizim can take advantage of this. The interest on the EPF remains tax-free until the interest rate exceeds 9.5%.
However, a major change was made in Budget 2021. From the financial year 2021-22, if the total contribution of the employee in the EPF and VPF is more than ₹ 2.5 lakh, then the interest received on it will come under the tax. If it only contributes to the employee’s account and the employer has no contribution, then this limit is up to ₹ 5 lakh.
In these cases, the Income Tax Department has clarified that two types of PF accounts will be created from now on. One will have information about tax -able interest and in the other tax-free interest. The interest statement of both will also be released separately.
Tax and TDS Rules on EPF withdrawal
EPF withdrawals occur in two ways- partial and complete. EPFO provides partial withdrawal (Advance withdrawal) to employees for major reasons like marriage, education, home buying or treatment. It is completely tax-free.
At the same time, the tax on Final withdrawal depends on how many years you kept the membership of EPFO. If you have contributed to the EPF for more than 5 years, the withdrawal will be completely tax-free. At the same time, if withdrawn is done in less than 5 years, then tax will be levied. However, tax is relieved in some circumstances:
- Leaving jobs for health reasons.
- Closure of the company.
- The end of the project.
Even though membership has been less than 5 years under these circumstances, withdrawal is considered tax-free. At the same time, if you voluntarily take out PF after leaving the job and 5 years have not been completed, then TDS will apply.
- If there is a PAN link, then 10% TDS.
- If PAN is not a link, then 34.608% TDS.
- If the withdrawal amount is less than ₹ 50,000, TDS will not be deducted.
Way to prevent TDS: Form 15G and 15h
If a person has a total income tax exemption limit, he can avoid TDS. For this, the Income Tax Department has provided the facility to fill Form 15G and 15H.
- Form 15G: Residents can fill people who are under 60 years of age and are less than the total income tax limit.
- Form 15h: For senior citizens above 60 years of age.
By filling these forms, EPF withdrawal can be exempted from TDS, provided the income is below the prescribed limit.
Also read: Does the late EPF interest suffer loss? Is not the calculated interest on the entire amount