Understanding Tax Implications on PF Withdrawal and Employee Provident Fund (EPF) Rules

Hi! I worked with a company for 4 years and 10 months and left in July 2009. Now I am with another company. My erstwhile company had its own PF Trust. If I wish to withdraw my EPF and EPS, will it be taxable now?

Regards,

Dear Naveen,

If you withdraw PF before 5 years, you are liable for a 30% tax deduction. It is advisable to either transfer the PF amount or leave it in the same trust and withdraw after one year. By doing so, you will also receive the interest paid on the amount.

Thank you.

Dear Varun,

It's already been 5 years, and my new company does not have a PF Trust. Will it be taxable if I withdraw from my previous company? Also, is it possible to withdraw EPF and EPS both?

Regards,

Yes, you can withdraw your EPF and EPS without getting taxed now. If you want to get it transferred, you can do so. If your present company does not have a PF trust, then their PF account must be with the PF Department (Govt.). Still, you can get it transferred there by submitting Form-13 to your present employer.

Thank you, Varun, for the information. However, I just spoke to the HR executive of my previous company, and he informed me that the same will be taxable! Could you please assist me by providing the clause or ruling for this? I urgently need to withdraw my PF.

Regards,

Dear Naveen,

I think it is tax-free because Provident fund is totally tax-free under section 80C.
Obviously, you can transfer both your EPF and EPS amounts to your new account, which is allocated by your current company. If your current company does not have the PF trust, then your previous company has to transfer your amount to the RPFC office of your current company.

Regards,
Dibyendu

The 5-year criteria for Taxation on PF is explained below:

This comes under consideration only for Recognized Provident funds like Trusts and only in certain cases.

Recognized provident fund (Trusts):

- The employer's contribution to such a provident fund in excess of 12 per cent of salary is taxable in the hands of the employee.
- Deduction under Section 80C available on employee contribution.
- The interest credited up to 9.5 per cent is exempt in the hands of the employee. However, the excess is taxable in the year of contribution or credit of interest.
- At the time of withdrawal, the accumulated balance will not be taxable if the employee has rendered five years of continuous service. If the accumulated balance includes any sums transferred from another RPF account maintained by a former employer, then the period of service with that employer should also be reckoned for this purpose.
- Rule 8 of Part A of the Fourth Schedule of the Income Tax Act provides the circumstances under which the accumulated balance payable to an employee is exempt from tax. If an employee fulfills any of the following conditions, payment from recognized provident fund is tax-free:
- If he has rendered continuous service with his employer for a period of five years or more, or
- If, though he has not rendered such continuous service, the service has been terminated by reason of the employee's ill-health, or by the contraction or discontinuance of the employer's business or other cause beyond the control of the employee, or
- 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 recognized provident fund maintained by such other employer.
- Explanation to Rule 8 provides that in case the balance payable to an employee includes amounts related to a fund maintained by former employers and transferred to a new recognized fund from which payments are being maintained, the continuous period of five years shall be counted by aggregating the numbers of years with other employers.

Withdrawal from RPF will be taxable if the employee has rendered less than five years of continuous service, and hence tax treatment shall be as below in Unrecognized PF.

Unrecognized PF:

- Employer's Contribution - exempt.
- Deduction under Section 80C not available on employee contribution.
- Interest credited to provident fund – exempt.
- Lump sum payment at the time of retirement or termination of service –
- Employee's own Contribution: Exempt
- Interest on Employee's own Contribution - Taxable under the head "Income from Other Sources"
- Balance taxable under the head Salaries, meaning Employer's Contribution.
- Relief under Section 89(1) as far as the employee's tax liability is concerned.

So, in a nutshell, yes, the withdrawal of PF monies is taxable at the applicable tax rate if the concerned member doesn't serve for a continuous period of 5 years, but subject to certain exceptions as below:
- From Statutory PF - fully exempt.
- From Recognised PF - exempt if the resignation happens due to ill-health or the voluntary business closure by the employer.
- From unrecognized PF - Own contribution exempt - interest on own contribution taxable - employer contribution and interest taxable.

Dear Vinicitehr & Ranjeet,
We have our own PF trust in our company and we are settling the PF withdraw cases from our provident fund trust, but we don’t deduct any TDS or TAX from their settlement amount. We have so many cases where the employee rendered less than 5 years service but we don’t deduct any tax amount from their settlement amount.

Please tell me whether it is duty of employer to deduct the tax from their settlement amount or it is duty of employee to deposit that amount to the government.
Regards,
Dibyendu

I don't think the withdrawal of PF below 5 years is taxable even if it is from the PF department or a Trust duly recognized by the PFC under the provisions of EPF & MP Act, 1952. The entire amount is exempt under section 10(D) of the I T Act, 1961. So no question of deduction of TDS on PF withdrawals for the present. But in the future, once the latest amendments as suggested recently are approved by the Parliament, then the PF withdrawal is taxable from the Assessment Year 2011-12 onwards.

Dear All,

I have one query. We have many employees in our company, and some of them are over 58 and 60 years old, but they want to contribute to the Provident Fund.

Please let me know if they can contribute to both the PF and Pension or not.

Regards,

Dibyendu.

I have a query which I had raised in this forum earlier.
1) If i am unemployed for two months or more, is the PF withdrawn from earlier company taxable even if I have not completed 60 months / 5 years ??
2) Lets say a person works for company A for x months then joins company B and gets his PF transferred to company B, works there for several months. He then leaves company B and wants to withdraw the PF. In this case whether the total tenure ( A+B) would be calculated or only the tenure with company B would be calculated for tax exemption ??
Regards
Saurabh

Mr. Dibyendu,

Employees can contribute to PF, but the employers' contribution will not go to the pension fund. It will directly reflect in Account No. (i.e., employees' contribution).

Dear friends, if there is any amendment from PF authorities' side, please let me have a copy or reference number.