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Tax Payers Alert: Income Tax on PF Premature Withdrawal

 Latest changes in rules of income tax on PF premature withdrawal:

“From June 1, workers’ retirement investment funds surpassing Rs 30,000 will be taxed at 10.3% or the maximum marginal rate of 30.9% in the event if they leave the employees’ provident fund before finishing five years of Service.”

 Reference- budget 2015 speech-link

Introduction – Income Tax on PF ( Provident fund)

An Employee Provident Fund account is a mandatory for all employees earning salary up to Rs 15,000 per month in firms or companies employing more than 20 workers. As per this practice, the portion of the employee’s salary is diverted to his or her PF account as a social security for old age days.

A major move has been taken by the Finance Minister Arun Jaitley which has made more resilient the income tax law on the withdrawal of Provident Fund by the workers before the completion of 5 years continuous service will attract the Tax Deduction at Source (TDS) at 10% plus education cess at 3% (effective tax rate 10.30%).

Analysis &Impact on Tax Payers

Tax Rate:The provision of deduction of Tax at 10.30 % is applicable only when the employee is holding a valid Permanent Account Number (PAN Card) otherwise deduction will be at the Maximum Marginal Rate (MMR) at 30.9 % as per the new introduced section 192A of the Income Tax Act.

Pan Card: Although those employees having PAN card and saves the higher amount during their service and pay income taxes will need to resubmit their past income tax returns where deductions were claimed against EPF contributions. The retirement savings of those employees earning over Rs 2,120 per month could be taxed at 30.9% if they don’t have a PAN card.

Period: The continuous period of 5 years will also include the previous employment provided that the PF balance available in the previous account is transferred to the new PF account. If the withdrawals of the Provident Fund made after the completion of 5 years period than tax will not be deducted in the hands of employees. The effects of taxation will be as follow:

  • Employer’s contribution (including interest accrued thereon): will be taxed as Salary
  • Interest on the Employees contribution: Taxable as Income from Other Sources
  • Payment received in respect of employees own contribution: Exempt from Tax

Further, it is to be noted that tax will not be deducted if in case the service is terminated by reason of the employees’ ill health or in discontinuance of the employer business or reasons which are out of the control of the employee.

Limit:If the withdrawal from the PF account is less than Rs. 30,000 and person gave declaration that their income under any tax slab than such deduction of TDS will be levied at the time of withdrawals.

Deductors of Tax: The income tax department has made it mandatory for all the trustees and/or any other person authorised to make the payment of the accumulated balance in the PF account of the employee should before paying such amount deduct tax at source.

Issue of TDS certificate:Every deductor of TDS shall issue a certificate of TDS (Form 16) within the time specified and shall also comply with the necessary compliances with regard to the payment of salary.

EPF Department Views

The officials of the Provident Fund Department has said that around 90% of EPF organisation constituting almost 8 Crores members don’t have the PAN Card and they would probably end up paying an over the top and unfair taxes on their savings during their service. The same issue has been escalated by the Labour & Employment minister to the Finance Ministry for further discussion.

Since the EPFO provides the social security to the employees mainly to low earning people of the society. Most of the people will belong to this category and hence may not be liable to pay taxes at all but it has also been pointed out that the limit of 30,000 is too low for the employees.

Investment to PF: An investment Tool

Investment in the provident fund is considered as an investment tool for many people as the same can be utilized for various purposes at the time of crucial needs such as education / marriage / medical treatment / purchase of plot / repayment of home loan etc.

Practical Insight: For Better Understanding

An employee Ms Gita (anonymous name) has been working with the Private Company since last 4 years and 11 months (who is maintaining a recognized PF) and she has given a request for the withdrawal to her ex-employer. Now the analysis of taxability of the PF is as follow:

As per the provisions in the Income-tax Act, if the employee has rendered a continuous service for a period of five years or more, then the withdrawal of accumulated balance from such Provident Fund is not taxable at the time of termination.

Now in the above case, since the period of service with the previous employer is less than the period of 5 years and hence TDS will be deducted from such withdrawal. Further, apart from the normal tax payment, the concessions that have been availed will also be paid on account of contributions to recognised provident fund.

Further, the total contribution made by the employer (not taxed earlier) will also be now taxable as profits in lieu of salary.

Also, if, the balance from the previous PF account is transferred to the new PF account (maintained and recognised by the company) than the same will not be taxable.

Conclusion

And as a matter of general practise, many people prefer for the withdrawal of PF amount due to the complexities involved in the process of transfer and also such withdrawal can be made only after 2 months of leaving the job. Therefore, considering the above analysis and department views, it can be said that TDS on PF is really a big deal for a low earning people in the society. Some measures are definitely be required into this area from the finance minister in the next fiscal year budget because these amendments have created a financial burden on middle and lower level employees at the ground level .

I hope this article helps you. Share this post on social media to make your friends aware about rules of income tax on PF withdrawal.

 

 

 

17 Comments

  1. By deepa

    Hi Tarannum,

    Thanks for the article on ‘Tax Payers Alert-income tax on PF premature withdrawal’.
    I wanted to know few things regarding this change:
    1)So now is there no need/use of submitting the 15g form and PAN to avoid tax on PF withdrawal before 5 years?
    2)I live abraod now,not employed in India,so how will the PF office/IT know not to tax me for this?
    3)Will i be taxed 10.3% now if i submit form 19,10c,15g and PANcard??What other forms need to be submitted to avoid complete tax?

    • By admin

      You have to submit form 15g plus PAN cardto avoid TDS deduction on PF withdrawan.

      If you are non resident INDIAN for current year, you cannot submit form 15G. But submit your PAN card to avoid deduction of TDS at maximum marginal rate.

      Do not worry about TDS deduction because you can get it back by filling income tax return.

  2. By sagar

    Hi Tarannum,

    Thanks for the article on ‘Tax Payers Alert-income tax on  PF premature withdrawal’.
    I wanted to know few things regarding this change:
    1)So now is there no need/use of submitting the 15g form and PAN to avoid tax on PF withdrawal before 5 years?
    2)I live abraod now,not employed in India,so how will the PF office/IT know  not to tax me for this?
    3)Will i be taxed 10.3% now if i submit form 19,10c,15g and PANcard??What other forms need to be submitted to avoid complete tax?

    • By admin

      I have already replied for comment.

      • By sadaqat ali

        ” 21. Jurisdictional Chief Commissioner of Income‐tax or Commissioner of
        Income‐tax (if not assessed to Income‐tax earlier)” What will be mention if not assessed to earlier.

        22. Estimated total income from the sources mentioned below: total income from salary + PF amount will be mention ? in that column ..? pl guide me

      • By admin

        21- leave it blank.

        22 – estimated total income of fy 2015-16. For PF taxability read the full article.

  3. By Kamal

    Hi Tarannum,

    I have been working with an organisation A for 4 years and 11 months. Before that i have been working with an organisation B for 2 years 10 months. I transferred the PF amount from Organisation B to Organisation A when I joined it. Now i have been relieved from it. I tried to withdraw my PF now, Organisation has asked me to submit form 15G. So do i need to submit it. Can you please clarify it.

    • By admin

      Your service ( Cumulative) is more than 5 years so TDS 10.3% will not be applicable. So there is no need to submit form 15G. However if you want to submit, You can submit form 15G only if your estimated total taxable income for fy 2015-16 is NIL.

  4. By Savitha M S Rao

    Hi, Indeed the article has helped us.. Just wanted to reconfirm what I have understood. Generally Employees wont wait for 5 years to withdraw their PF. we have common cases where they would have worked for 1 year and apply for withdrawal, along with Form 19 and 10 c , I am also attaching form 15 g and giving it to employees, say if their PF amount is around 36k for last 2 years, what is the tax deducted on this and to avoid, should we attach any thing else.

    • By admin

      I request you to read article again to know about TDS rate.

  5. By ruchita

    Hi Tarannum,

    Do we need to include interest availing on FD’s(filled Form 15G on FD’s) with PF amount in column 23 Estimated total income of previous year and what should be occupation for jobless

    • By admin

      Yes, interest should be included in column 23. NO need to write anything in occupation or write No occupied.

  6. By Ruchita

    Hi
    Do we need to add FD interest in column 23 and details of FD on which form 15G is already applied for tax exemption in column 24?
    Thanku so much

  7. By Vivek

    I left my employer recently after serving for 4 years and 9 months. I am relocating abroad. Do I need to furnish Form 15G to avoid TDS on my PF withdrawal?

  8. By Russell Lowe

    Which Schedule should be filled for PF withdrawal

  9. Hi Tarannum,
    what should i write in the field 23. Estimated total income of the previous year in which income mentioned in Column 22 is to be included.

  10. By vishal

    hi..
    I was working with a company from 04th June 2012 to 31st March 2015. I joined another company in April 2015. I resigned from that company in December 2015. Since 1st January 2016, i am unemployed (Have started my own business). I have not withdrawn my PF. Do i need to submit form 15G as my income for 2015-16 will be well above the exemption limits??

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