5 years of continuous service mandatory for tax free EPF withdrawal

Answer by Dr. Suresh Surana, Founder, RSM India.

Investments in Employees’ Provident Fund (EPF) have exempt-exempt-exempt (EEE) status, i.e. exemption on investment, exemption from interest earned on it and exemption on maturity. However, these exemptions are subject to conditions.

Five years of continuous service is a mandatory condition for availing exemption on withdrawal of amount from EPF account. The Act specifies certain circumstances in which the amount withdrawn before the provision of five years of continuous service is eligible for exemption. These exceptional scenarios are listed below:

If the service is terminated for the following reasons:

a. poor health of the employee; Or

NS. by the contraction or closure of the business of the employer; Or

C. Other reasons beyond the control of the employee

It is pertinent to note that the Act states that while computing the period of 5 years, the period served under the former employer/employer should also be taken into account. There is no such clarification given in the Income Tax Rules or PF Rules which states that a period exceeding 6 months should be treated as 1 completed year. Hence, it can be inferred that here a period of 5 years means 5 years have been completed and since as an employee you have rendered service only for 4 years, 11 months and 28 days i.e. 4 full years, The amount withdrawn from the EPF account may be subject to tax, except in case it is covered under the above 2 cases.

However, in case of continuous unemployment for one month, section 68HH of the Employees’ Provident Fund Scheme, 1952 provides for withdrawal of 75% of the outstanding amount in the PF fund. The remaining 25% can be withdrawn after two months of unemployment.

Further, for claiming tax exemption, you can avail the benefits provided by the Government vide notification GSR 225(E) dated 27.03.2020, previously non-refundable by EPF members in the current pandemic situation. Allows withdrawal of advance. Sub-para 3 under Para 68L of the EPF Scheme, 1952. Accordingly, you will be eligible for a non-refundable advance of up to 3 months of Basic Pay and Dearness Allowance or up to 75% of the amount standing to credit. The government, as announced on May 31, 2021, has also allowed its members to avail of the second COVID-19 advance on the same criterion.

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