If you want to know how your withdrawals from EPF are taxed, then this one’s for you!
You must have heard about EPF, how it is a retirement planning scheme and its overall benefits to its subscriber, including the deductions allowed under Section 80 C of Income Tax Act and tax-free proceeds. But one thing that many are unaware of is TDS or tax implications on pre-retirement EPF withdrawals.
To discourage the practice of early withdrawal from EPF balance, the government has imposed certain Income Tax rules, which we will discuss in detail.
Before, moving ahead with the topic, let's know the basic components of EPF contribution, which will help you to understand the taxation of EPF withdrawals.
An EPF contribution has four-component, which are as follows:
- Employee's contribution.
- Employer's contribution.
- Interest earned on employee's contribution.
- Interest earned on employer's contribution.
EPF Withdrawal After Quitting a Job
According to the rules prescribed by EPFO, a subscriber can withdraw 75% of the EPF balance after one month of quitting the job. And, rest 25% of the EPF balance can be withdrawn after more than two months of continuous unemployment.
EPF Withdrawal Before 5 Years
In case you decide to withdraw your EPF balance before five years of continuous service, the TDS or tax deducted at source of 10% is levied. The five continuous years of service could be with one employer or multiple employers, without a break.
If you withdraw your EPF balance after the completion of five years of continuous employment, you are exempted from any form of tax. Under this rule, the income tax will be levied on the three components of the EPF contribution except for the employee's contribution, which is exempt from tax. But if the employee had claimed deduction under Section 80 C in the previous year, then it becomes taxable under the head 'Salary.'
Other Exemptions Allowed
- If the withdrawn amount is less than Rs. 50,000 or employer is closing down the business, no TDS is levied.
If the withdrawn amount is more than Rs. 50,000 and the period of employment is less than five years, you can submit the Form 15G to get an exemption, only if, the income for that year is less than the taxable limit.
If the service of employee is terminated due to ill-health.
If you have not provided your PAN information to the EPFO, and your is withdrawal is more than Rs 50,000, then TDS deducted will be deducted at the highest rate of 30%.
EPF Withdrawal from unrecognised EPF
Unrecognised EPF (UEPF) schemes are those EPF, which is started by employer and employee of an establishment, following all the rules of EPFO, but is not recognised by Commissioner of Income Tax or any formal authority.
Since the UEPF schemes are not recognised by the Income Tax Department, no income tax benefits are provided to a subscriber of this scheme.
Therefore, all the four components of EPF contributions are taxed during EPF withdrawals, whether it is before or after 5 years of continuous employment.
EPF Withdrawal Post-Retirement
Any amount withdrawn from EPF corpus after five years of continuous employment is tax-free, so is the EPF balance fully withdrawn after your retirement.
However, many individuals continue to maintain their EPF account post-retirement and any interest earned on the EPF-balance post-retirement is fully taxable. The interest earned is taxed under the head 'Income from Other Sources.'
You need to disclose your interest earned from EPF balance and pay tax accordingly.
Employee Pension Scheme (EPS)
The employer's contribution of 12% of employee's basic salary and DA to EPF balance is divided into two parts, 3.67% to EPF and 8.33% to EPS.
The amount credited to EPS balance can be withdrawn before the completion of 10 years of continuous service, and after that, it is prohibited by EPFO and the pension is compulsory.
The amount withdrawn from EPS is fully taxable, and is taxed under the head 'Salary.'
How Are the Different Components of EPF Contribution Taxed?
Understand how the different components of the EPF contributions are taxed and under which Income Tax head does it fall in.
Own Contribution or Employee's Contribution
This portion of the EPF is not taxable, but if you have claimed deduction under Section 80C in previous years, then you have to pay additional tax.
Interest on Employee's Contribution
This portion of the contribution is taxed as income under 'Income from Other Sources’.
Employer's Contribution and Interest Earned on Employer's Contribution
This two-component of the contribution is fully taxable and is taxed under the head 'Income from Salary' while filing the income tax return.
Under Form 26AS, the entry for TDS deducted from this source can be found under Salary TDS.
Calculation of Tax on EPF Withdrawals
Till now, you have read how different components of EPF are taxed during withdrawal before the five-year period of continuous employment, which might have left you little confused with the tax calculation part. In this segment, we will look at the tax implications and benefits of EPF withdrawals.
As employee's contribution is eligible for tax deduction under Section 80C, you have to find out whether the benefit has been availed by you in the previous year.
One point to be noted here is that TDS on EPF withdrawal is not the final tax liability. You still need to re-calculate your tax-liability and pay the taxes accordingly. You might also get a refund, in case your tax liability is less than TDS.
Following are the steps to calculate excess tax in the previous year
- Exclude all your EPF contribution from total 80 C contribution in previous years.
- Add employer's contribution to your taxable income.
- Add the interest earned component to your taxable income.
- Recalculate your tax liability, as per the tax rate of that year.
- Get the difference of excess tax liability as per the re-calculation.
How to Pay the Taxes on EPF Withdrawal
Once you are done with your calculation of excess tax liability of previous years, you need to do the following steps to pay the taxes.
- Visit the NSDL Tax Payment page and select Form 280.
- Select the Financial Year for which you are paying the taxes.
- Repeat the process for rest of the Financial Year, you want to pay taxes.
- Now, file your revised Income Tax Returns for the previous years, by approaching the assessing officer.
Many tend to avoid paying the taxes on EPF withdrawal made before the 5 years period, because of the complexities involved in calculation, payment and return filing. But if steps are followed or if you take help of a tax consultant, it becomes an easy task.