Confused About PF Withdrawals and Tax Implications? Let's Discuss Your Scenarios

Dear Seniors,

Though there are many threads about PF across the net, the reason for me raising it again is that after reading a few documents, I'm almost lost now. If I could get answers specific to these questions, it will help me solve this puzzle.

Situation 1: Let's consider a situation where a fresher joins a company, works there for 2 years, and then goes for higher studies. He chooses to withdraw his PF. Will he get both Employee Contribution and Employer Contribution? If yes, will it be post-tax deduction? If yes, what is the tax percentage?

Situation 2: A fresher joins a company, continues for 6 years in the same company, and decides to start his business and wants to withdraw PF. Will there be any tax deduction? If yes, what is the tax percentage?

Situation 3: Company 1 from 1st Jan 2000 to 31st Dec 2003, joins the second company on 1st Jan 2004, and quits on 31st Dec 2007. He duly transferred his PF from Company 1 to 2. Now starting his own business and wants to withdraw. So, with a total of 7 continuous years of PF contribution, when he withdraws PF, will it be taxed?

Situation 4: Company 1 from 1st Jan 2000 to 31st Jun 2003, joins the second company on 1st Jan 2004, and quits on 31st Dec 2007. He duly transferred his PF from Company 1 to 2. Now starting his own business and wants to withdraw. Though there is a total of 7 years, there is a 6-month break in between. Will this be considered as 5 continuous years, and will he get his PF without being taxed?

Thanks in advance.

Regards,
tklokesh

Situation 1: Yes, he will get both without the deduction of tax. The employer's contribution will be in the form of withdrawal from the pension fund.

Situations 2, 3, & 4: No tax.

Regards,
Varghese Mathew

In my opinion, since the service is less than 10 years, all the pending amounts in the account shall be settled by the PF Department along with up-to-date interest and without any tax deductions. Thus, the answer to all three points as per queries is the same.

Regards,
A.K. Chandok
RPFC (Retd.)
www.akchandok.com

Many subscribers to EPF have a doubt about whether the amount of money they receive at the time of settlement of their EPF account is taxable or not. Similarly, there is also uncertainty about whether, if they resign from a job and get their EPF settled before joining a new job, the amount of such EPF settlement is taxable or not. There is also a common fear that the EPF settlement amount one receives on resigning from a job within five years of service is taxable.

All these confusions arise because of the difference between the EPF account maintained by the EPFO and the one maintained by the companies themselves. Such EPF accounts maintained by the companies themselves are called Exempted Provident Funds. These Exempted Provident Funds are governed by Part A of Schedule IV of the Income Tax Act. These provisions are not applicable to the EPF accounts maintained by the EPFO.

Relevant Rules Applicable to Exempted Provident Funds

The relevant rules applicable to the Exempted Provident Funds are as follows:

Rule 8 of Part A of Schedule IV

8. The accumulated balance due and becoming payable to an employee participating in a recognized provident fund shall be excluded from the computation of his total income:

- (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 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]
- [(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 recognized provident fund maintained by such other employer.

Explanation: Where the accumulated balance due and becoming payable to an employee participating in a recognized provident fund maintained by his employer includes any amount transferred from his individual account in any other recognized provident fund or funds maintained by his former employer or employers, then, in computing the period of continuous service for the purposes of clause (i) or clause (ii), the period or periods for which such employee rendered continuous service under his former employer or employers aforesaid shall be included.]

Rule 9 of Part A of Schedule IV

Tax on Accumulated Balance

9. (1) Where the accumulated balance due to an employee participating in a recognized provident fund is included in his total income owing to the provisions of rule 8 not being applicable, the [Assessing] Officer shall calculate the total of the various sums of [tax] which would have been payable by the employee in respect of his total income for each of the years concerned if the fund had not been a recognized provident fund, and the amount by which such total exceeds the total of all sums paid by or on behalf of such employee by way of tax for such years shall be payable by the employee in addition to any other [tax] for which he may be liable for the previous year in which the accumulated balance due to him becomes payable.

(2) Where the accumulated balance due to an employee participating in a recognized provident fund which is not included in his total income under the provisions of rule 8 becomes payable, an amount equal to the aggregate of the amounts of super-tax on annual accretions that would have been payable under section 58E of the Indian Income-tax Act, 1922 (11 of 1922), for any assessment year up to and including the assessment year 1932-33, if the Indian Income-tax (Second Amendment) Act, 1933 (18 of 1933), had come into force on the 15th day of March, 1930, shall be payable by the employee in addition to any other tax payable by him for the previous year in which such balance becomes payable.

As already stated, these rules are not applicable to the EPF accounts maintained by the EPFO. There is no tax liability for that amount at any stage.

Please note:

Where the PF amount is withdrawn before five years of continuous service, it may be taxable in the hands of the individual as if the fund was not recognized from the start of the contributions. In such a case, payment received by the individual in respect of the employer’s contribution along with the interest accrual thereon is taxed as “salary.” Interest on the employee’s contribution is taxable as “other income.” Payment received in respect of the employee’s own contribution is exempt from tax (to the extent not claimed as a deduction earlier).

I-T provisions provide that the trustees of a recognized PF or any person authorized by the regulations of the fund to make the payment of the accumulated balance to the employee should deduct tax at source while paying the amount. Further, the person liable to deduct tax has to issue the certificate of tax deducted at source (Form 16) within the specified time frame to the employee, depicting the details of taxes withheld from the accumulated PF balance and also comply with other salary-related compliance necessities.

The guidelines are clear - whether you start your own business or seek fresh employment, the criteria is only the completion of 'Continuous service,' which also includes past service with membership in a recognized Provident Fund. Short of that 5 years, TDS is applicable, and the Payroll authorities should deduct TDS as if the amount withdrawn is a part of salary. Other views, if any, may be indicated here for more clarity, please.

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