Withdrawing From The Provident Fund Account Without Knowing The Taxation Aspects?

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When Akshay came to my office with his documents for filing his return of income he was very sure that he didn’t have to pay any taxes. As the discussion went ahead I came to know that he has resigned from his first job after serving three years of employment and he had also withdrawn the entire amount lying in his Provident fund account. If Akshay had known of the Income tax provisions he wouldn’t have committed this mistake. The amount withdrawn from the PF Account was entirely taxable in his case and he has to pay taxes on the PF withdrawal.

EPF or Employee provident fund savings are meant for towards retirement years. It is generally advised not to withdraw the corpus before retirement. According to the provident fund norms, 12 percent of an employee’s salary goes into the fund along with a matching contribution from the employer.

TAXATION ASPECTS TO KNOW DURING THE PFs INVESTMENTS:

  1. Tax at the time of Investment

Both the employer and employee contribute a part of their salary to the provident fund account. The taxability of both these contributions is explained below:-

Employer Contribution

Provident Fund

At the time of making a contribution the amount contributed by your employer is tax free if it is within the specified limit which is 12%. Any amount contributed by your employer over and above 12% is taxable in your hands as “Income from Salary”.

Employee Contribution

Provident Fund employee contribution

Your contribution towards PF can be claimed as deduction under Section 80C. Since the maximum deduction allowed under Section 80C is Rs.150000, therefore that is the maximum you can contribute. It is mandatory to contribute 12% but you choose to contribute more, which will be deducted from your salary. However the deduction that you will get is limited upto Rs.150000.

TAXATION ASPECTS TO KNOW AT THE TIME OF PF WITHDRAWAL:

  1. Tax on Interest earned

The Interest earned over and above 9.5% is taxable as “Income from other sources”.

  1. If the withdrawal from a recognised PF happens after five years of continuous employment, it attracts no tax liability. In case of employment with different employers, if the PF balance maintained with the old employer is transferred to the PF account of the new employer, it is considered as continuous employment.
  2. If an employee has been terminated because of certain reasons beyond his or her control (such as ill health and discontinuation of business of employer), the withdrawal does not attract any tax, irrespective of the number of years of employment.
  3. In case of a withdrawal before five years, the amount become taxable in the same financial year. Thus the amount to be shown in your tax return for the next assessment year. The Employer’s contribution to PF and Interest earned on it is added to one’s income and taxed accordingly.
  4. In addition, if you have claimed benefits under section 80C on your own PF contribution, it will taxed as Salary. The interest earned on your own contribution will be taxed as “Income from other sources” and taxed according to the respective tax slabs.
  5. If the withdrawal is after a period of five years of continuous employment, it attracts no TDS or any tax. However if the withdrawal is before the period of five years then the tax shall be deducted @10%.

Also Read: 6 Mistakes You Are Making While Investing In Mutual Fund

Do not commit a mistake like Akshay, always take an advise from Professionals before doing any financial transactions.

Suyash Tripathi is a qualified Chartered Accountant and runs his own CA firm in Mumbai. You can reach out to him for all your Taxation and Investments queries at [email protected]abacussolutions.co.in or at +91 9987072876. 

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