Employee Provident Fund (EPF) is a long-term savings scheme that helps salaried individuals build a retirement corpus. Managed by the Employees' Provident Fund Organisation (EPFO), this scheme mandates monthly contributions from both, the, employer and the employee. However, when it comes to withdrawing the accumulated corpus, especially before the stipulated period, individuals often face confusion around taxation.
This article takes a look at the applicable income tax on EPF withdrawal and explains how it can impact your savings and retirement planning.
What Is EPF Withdrawal?
EPF Withdrawal refers to the process of withdrawing the amount accumulated in your EPF account. This can happen under various circumstances, such as retirement, unemployment, financial emergencies, or a job change. While withdrawals post-retirement are typically tax-free, PF withdrawals incur tax under certain conditions.
Understanding the taxability of PF withdrawals early on can help you better structure your long-term financial plans.
Eligibility for EPF Withdrawal
Eligibility for EPF withdrawal depends on age, employment status, and the purpose of withdrawal.
- You can withdraw the entire EPF amount after retirement, with the EPFO considering 55 as the official retirement age.
- Once you turn 54, you may withdraw up to 90% of your balance a year before retirement.
- If you are unemployed for one month, 75% of your EPF can be withdrawn, while the remaining 25% can move to your new employer’s PF account.
- After two months of unemployment, the entire amount becomes eligible for withdrawal.
EPF withdrawal is also possible online, without the employer’s consent, when your Aadhaar is linked to your UAN.
Reasons for Partial EPF Withdrawal
EPF allows employees to make partial withdrawals, as a way of providing financial assistance during important life stages.
Common reasons include:
- Medical treatment
- Higher education
- Marriage of children
- Home renovation
- Home loan repayment
- Purchasing land or property.
Each reason has set eligibility criteria and withdrawal limits.
While these options offer flexibility, always evaluate the PF withdrawal tax implications before proceeding.
When Is EPF Withdrawal Taxable?
Understanding the income tax on EPF withdrawal requires knowing the holding period. If your EPF balance is withdrawn before you complete five continuous years of service, the amount becomes taxable. Here's a breakdown of how the tax is applied:
- Employee’s contribution is taxable as per your income slab.
- Employer’s contribution and the interest earned on it are fully taxable.
- Interest on the employee's contribution is also taxable as ‘Income from Other Sources’.
- TDS is deducted at 10% if the amount exceeds ₹50,000, and PAN is furnished.
If PAN is not provided, TDS is deducted at the maximum marginal rate of 30%. This is where an income tax calculator becomes handy to estimate your tax liability.
When Is EPF Withdrawal Tax-Free?
Withdrawals are tax-free in the following cases:
- After five years of continuous service.
- If termination of service is due to ill health or employer-related reasons.
- If the amount is transferred to the National Pension System (NPS).
- On retiring at the age of 58.
It is advisable to regularly check EPF status and balance online to monitor your contributions and plan your withdrawals accordingly.
In addition, regularly reviewing your balance can also help compare EPF with other options for better retirement planning. You can compare EPF vs NPS or EPF vs PPF (Public Provident Fund) for better retirement planning.
How to Calculate Tax on EPF Withdrawal?
To calculate tax on your EPF withdrawal, you need to:
Step 1. Determine your total EPF amount.
Step 2. Separate the employer’s contribution, the employee’s contribution, and the interest.
Step 3. Use an income tax calculator to assess the tax applicable to each component.
If you are still unsure about the taxability of your PF withdrawal, seek professional assistance or refer to the IT Department guidelines.
TDS on EPF Withdrawal
TDS will only be deducted if the amount withdrawn is more than ₹50,000 before five years of service. However, you can avoid TDS by submitting Form 15G or 15H, provided your income is below the taxable limit. Note that ‘five years of service’ also includes work experience with your previous employer/s.
An income tax calculator helps you verify your tax liability and avoid any errors or surprises at the time of tax filing.
Tax on EPF Withdrawal by a Temporary Employee
If you have been hired on a temporary or contractual basis, you may not be considered part of the organisation’s permanent workforce. As a result, the employer is not required to contribute to EPF during this period.
Your ‘years of service’ as per EPF will begin when the employer later moves you to the permanent rolls and EPF contributions begin.
The five-year service period is calculated from the date you become a permanent employee, not from the temporary hiring date.
This means that if you resign after completing five years, including your temporary period, EPF withdrawal may still be taxable unless you have served five full years as a permanent employee.
Tax on EPF Withdrawal from an Unrecognised EPF
Not all provident funds receive approval from the Income Tax Commissioner. When a fund remains unrecognised, it is treated differently at the time of withdrawal. Even though such funds may be formally set up by an employer or registered with another authority, they do not qualify for the tax benefits available under recognised EPF schemes.
Because of this, money withdrawn from an unrecognised provident fund is always taxable, no matter how many years you have worked. The usual five-year service rule does not apply here. Employee contributions, employer contributions, and interest may all be taxed in different ways, which can increase your overall tax burden.
If your employer maintains a provident fund, it is helpful to confirm whether it is recognised for tax purposes so you can plan your future withdrawals wisely.
Smart Financial Planning with EPF
Your EPF savings are an essential component of your retirement planning. However, relying solely on EPF might not suffice for future needs. Complement your savings with other instruments like life insurance plans, pension plan options, and investment schemes.
Modern digital platforms now allow you to buy life insurance online with ease. You can also compare the best life insurance policy offerings to find the one that suits your needs.
Life Insurance and EPF
While EPF ensures long-term savings, life insurance plans provide financial security to your loved ones. Choosing the best life insurance policy helps in mitigating risks associated with untimely demise, while also offering tax benefits under Section 80C and 10(10D) of the Income Tax Act.
When planning your finances, always factor in both, risk coverage and retirement income. A comprehensive pension plan ensures a stable income post-retirement, making it a perfect complement to your EPF corpus.
How to Check EPF Balance?
It is essential to stay informed about your EPF account. You can check EPF status and balance online through the EPFO portal or the UMANG app. Keeping tabs on your contributions allows for better retirement planning and timely decision-making.
EPF Withdrawal and Tax Filing: What You Need to Know
If you have withdrawn your EPF before five years of continuous service and you incur income tax on your EPF withdrawal, you must report the withdrawal in your Income Tax Return (ITR). The total withdrawn amount should be split correctly across income heads such as ‘Income from Salary’ and ‘Income from Other Sources’. This ensures you calculate your liability accurately using an income tax calculator.
Also, remember that even if TDS has been deducted, you might still owe more tax depending on your income slab. On the other hand, if your total income is below the exemption limit, you can claim a refund for the TDS paid. Always keep your Form 16/EPF withdrawal statements for tax filing.
Being tax-aware boosts smarter retirement planning.
Retirement Tools You Can Use
Many digital tools are available today to streamline your financial planning. A retirement calculator helps you estimate how much corpus you’ll need for a comfortable life after retirement. Pair this with an income tax calculator to understand your net income and savings potential.
Final Thoughts
Understanding income tax on EPF withdrawal is critical to safeguarding your hard-earned money. If you plan to withdraw before five years, be prepared for taxation and TDS. However, with proper planning, you can avoid unnecessary tax liabilities and use your savings wisely.
Combine your EPF savings with reliable life insurance plans, a solid pension plan, and tools like a retirement calculator to secure your future. Don’t forget to regularly check EPF status and balance online and stay informed with the help of an income tax calculator.
The journey to a financially secure retirement begins with informed decisions today. Start planning now and ensure your future self enjoys a healthy retirement.
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