EPF Taxation on withdrawal

It's a common doubt that how the EPF amount is going to be taxed? How much of service is required to make it non taxable? and many more. Here i will discuss how EPF withdrawal amount is taxed and how much TDS is deducted.  When you leave your job, you may choose to withdraw your EPF amount. This amount may be taxable and may not. Here are the rules -

How much TDS is deducted ?

• Income Tax shall be deducted at source (TDS) at the following rates if at the time of payment of the accumulated PF balance is more than or equal to Rs.30,000  50,000, with service less than 5 years:-
  
  a) TDS will be deducted @ 10% provided PAN is submitted. In case Form No. 15G or 15H is submitted by the member, then no TDS shall be deducted.
  
  b) TDS will be deducted @ maximum marginal rate (i.e. 34.608%) if a member fails to submit PAN (and no Form No 15G or 15H).
• TDS shall not be deducted in respect of the following cases:-
  
  1) Transfer of PF from one account to another PF account.
  
  2) Termination of service due to ill health of member, discontinuation/contraction of business by employer, completion of project or other cause beyond the control of the member.
  
  3) If employee withdraws PF after a period of five years of continuous service, including service with former employer.
  
  4) If PF payment is less than Rs. 30,000 50,000 but the member has rendered service of less than 5years.
  
  5) If employee withdraws amount more than or equal to Rs. 30,000 50,000, with service less than 5years but submits Form 15G/15H along with their PAN

Taxation when you delay your withdrawal after resign, retire or terminated

If you believe that the amount received is a fully exempt tax on EPF after resign, retire or terminated in case of an employee who is in continues service for a period of 5 years or more. Than you right but not completely. By delay in withdrawal i mean to say that you got off the job in year 2012 and didn't withdraw the amount due in that year and now after 5 years you decide to finally withdraw your EPF amount. In this case taxation is different.

Before i discuss how EPF amount is going to be taxed in case Here is an interesting case which cleared all the air about EPF taxation. 

"The man had retired from a prominent Bengaluru-headquartered software company after 26 years of service, on April 1, 2002, and the total amount in his EPF account then was Rs 37.93 lakh.

Nine years later, on April 11, 2011, he withdrew the grown sum of Rs 82 lakh from his EPF account. This amount included interest of Rs 44.07 lakh that had accrued post his retirement till the date of  withdrawal.

The retired employee did not offer this interest amount to tax, as he viewed it would be exempt under Section 10 (12) of the I-T Act. During assessment proceedings for financial year 2011-12, the I-T  officer sought to levy tax on this amount and the litigation finally reached ITAT's doors."

Based on a reading of Section 10(12) and also the definition of "accumulated balance", the ITAT held: "The exemption is limited to the accumulated balance due and payable to an employee up to the date of his retirement or end of his employment."

ITAT pointed out that the term "accumulated balance due to an employee" is defined as the balance standing to his credit, or such portion of it as may be claimed by the concerned employee under the regulations of the fund "on the day he ceases to be an employee".

Thus, the ITAT agreed that the interest earned post retirement was taxable in the hands of the retired employee. However, it added that the aggregate interest of Rs 44.07 lakh should be taxable in the hands of the retired employee, in the respective financial years in which the interest income actually arose.

Conclusion:-

• Once you cease to be an employee for whatever reason - retire, resign or terminated, than the interest earned from that day (date of exit) till the day you withdraw will be taxable.
     
• This taxable interest from the DOE (date of exit) till date of withdrawal will be taxed in the year of accrual (same as for fixed deposits) and not only in the year of withdrawal. It means if interest earned in this case will be taxable every year and you need to declare it in your ITR.
     

Other Important Points

• The field offices shall deposit the Tax Deducted at Source (TDS) and returns thereof by 7th of the following month.
    
• Members who have rendered continuous service of 5 years or more, including service with former employer, shall not be required to submit PAN and Form No. 15G/15H along with Form No. 19.
     
• Members whose service has been terminated due to his ill health, contraction or discontinuance of business of employer or other cause beyond the control of the member shall not be required to submit PAN, Form No. 15G/15H alongwith Form No. 19. In such cases, no income tax (TDS) shall be deducted.
     
• Form 15G and 15H may not be accepted if amount of withdrawal is more than taxable limit

Related Links : - 
- How to withdraw EPF online using UAN Portal
- How to transfer your EPF online using UAN portal
- EPF Auto Transfer: Composite Declaration Form (Form - 11) w.e.f Sep 2017
- Understanding Employee Pension Scheme, EPS
- All you want to know about Form 15G / Form 15H : Save TDS on Interest Income



References : -
[1] Instructions for deductions of TDS on withdrawal from EPF
[2] Deduction of TDS
[3] Change PF limit from30,000 to 50,000
[4] Times of India article