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, employer and employee. However, when it comes to withdrawing the accumulated corpus, especially before the stipulated period, individuals often face confusion around taxation.
This article demystifies the 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 job change. While withdrawals post-retirement are typically tax-free, premature withdrawals are subject to tax under certain conditions.
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 If your EPF balance is withdrawn before you complete five continuous years of service, the amount becomes taxable.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.
How to Calculate Tax on EPF Withdrawal?
To calculate tax, you need to:
Step 1. Determine your total EPF amount.
Step 2. Separate employer’s contribution, employee’s contribution, and interest.
Step 3. Use an income tax calculator to assess the tax applicable to each component.
If you are unsure, 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.
An income tax calculator helps you verify your tax liability and avoid any errors or surprises at the time of tax filing.
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 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 it is taxable, 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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