Provident Fund Tax deduction - taxable income.. CiteHR

jeeni Started The Discussion:

Dear All,Is there any amendment in the provisdent fund act or any notification by the government that if a person will Withdraw his Provident fund before the completion of 5 years, then 33% will be dedected in the form of TAX.I just want to clear it from my respected seniors.In my company which belonng to TATAS having our own Trust for this purpose are deducting on the Provident Fund if an employee will withdraw before 5 Years.Plz Reply with details.Yours FaithfullyRanjeet

Madhu.T.K -  Member Since: Sep 2007
Dear Ranjit,

I presume yours is an exempted establishment. I have not come across with special provisions of such establishments. I believe that rules of such establishments will be different and there may be provisions in the respective trust deed to this effect. I shall study the matter and get back to you very soon. Till then please bear with me.



Madhu.T.K -  Member Since: Sep 2007
PF through a separate trust is permitted only when the establishment offers better facilities through the trust than that offered by the EPFO.These establishments are called exempted establishments. The PF of exempted companies will be regulated by the schemes framed in this respect by the respective establishment. Therefore, provisions relating to tax deduction @ 33% when an employee withdraws the fund before 5 years shall be available in the TATA's provident fund schemes only. There is no such provision in the Employees Provident Fund & Miscellaneous Provisions Act or Schems.



jeeni -  Member Since: Jan 2008
Dear Madhu,Thanks! But can u explain in which section of the provident fund act it is written.RegardsRanjeet

Madhu.T.K -  Member Since: Sep 2007
Dear Ranjit,

As already pointed out, there is no such provision either in the EPF Act or EPF Schemes. For exempted establishments which are given permission to have separate PF Trust, the schemes will be made by the establishment only and in that scheme it should have been mentioned that 33% shall be deducted if any employee leaves before 5 years of service. There is no such provision in the Act and , therefore, this is not applicable to other establishments which are covered by EPF Act.



Rahul Kumar -  Member Since: Dec 2006
Dear Ranjeet,

Your query needs some explaining. PF may or may not be taxable under certain conditions. Here is how it goes:

Employer's contribution to EPF is not considered as taxable salary subject to compliance of stipulated conditions. Employee contribution to EPF is considered as deduction under section 80C from the gross taxable income to determine the net taxable income.

PF withdrawal is not taxable only if a person has been in continuos service for 5 years. (Just for the sake of explaining, in your case if you have had PF balance from your previous employer then such balance should have been transferred from your previous employer to your current employer and the period of service of both employers would need to be aggregated to check if you have completed 5 years of continuous service).

The general perception that whatever is the balance with the Provident Fund is non taxable at the time of withdrawal. However , it is not entirely correct. There are circumstances when even the savings in provident fund (accumulated balance ) becomes taxable.

Section 10(12) of the I T Act exempts all payments from any provident fund set up by Central Government or any provident fund on which Provident Fund Act applies. This means , if you are employees of Central government or State Government or of any employer whose fund are managed by Provident Fund authorities , any payment from such provident fund is total exempt .

Wherever, employer maintains PF of the employees through a trust and gets recognition from Commissioner of Income Tax for such trust, the employee needs to be careful regarding the taxability of accumulated balance because the payments from such recognised PF is taxable in certain circumstances. Section 10(12) of the I T Act gives exemption to payment from recognised provident fund as under

(12) the accumulated balance due and becoming payable to an employee participating in a recognised PF, to the extent provided in rule 8 of Part A of the Fourth Schedule ;
Rule 8 of Part A of the Fourth Schedule of I T Act provides the circumstances under which the accumulated balance payable to an employee is exempt from tax. If employee fulfills any of following conditions, payment from recognised provident fund is tax free :
(i) if he has rendered continuous service with his employer for a period of five years or more, or (ii) if, though he has not rendered such continuous service, the service has been terminated by reason of the employees ill-health, or by the contraction or discontinuance of the employers business or other cause beyond the control of the employee, or
(iii) if, on the cessation of his employment, the employee obtains employment with any other employer, to the extent the accumulated balance due and becoming payable to him is transferred to his individual account in any recognised PF maintained by such other employer.


Rahul Kumar

jeeni -  Member Since: Jan 2008
Dear Rahul,Thanks! Now i got it.Thanls for such a good explanation.Madhu sir, From you we junior members can learn a lot.Take care allRegardsRanjeet

mamta.g.123 -  Member Since: Apr 2010
Sir ,
I had worked for Perot Systems . TSI limited for 2.5 years. I was laid off from the company on 21st Feb, 2009. Last month I had applied for my PF withdrawal. Now I recieved 49K as my PF after 30% tax dedcution. since i was laid off from the company and never resigned, is it valid for the company to deduct my PF by such an heavy amount when my current year's salary is below the exemption limit.
Kindly reply


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