How is tax applicable on withdrawing money from PF?

Name withheld on request

It is assumed that you are not presently with an employer to whom the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 do not apply.

As per the provisions of the Income-tax Act, 1961, the accumulated balance due and payable to an employee participating in a recognized provident fund shall be excluded from the computation of his total income subject to the following conditions:

One. if he has rendered continuous service with his employer for a period of five years or more, or

B. If the service is terminated on account of ill health of the employee, or contraction or closure of the business of the employer or other cause beyond the control of the employee, or

C. If, on termination of employment, the employee takes up employment with another employer, the accumulated balance due and payable to that extent is transferred to his individual account in any recognized provident fund maintained by the new employer; Or

D. If the entire balance standing to the credit of the employee is transferred to his NPS account

Since your period of service and period of contribution is less than 5 years, your case does not fall in any of the prescribed scenarios under Rule 8 mentioned above. Thus, withdrawal of EPF accumulated balance (if permitted under PF laws) will be treated as taxable.

Based on the provisions of rule 9 of Schedule IV of the Act, the computation of tax (for previous years of contribution) required to be made as if the fund was not a recognized provident fund would include the following:

• Employer’s contribution towards EPF (to the extent it was not taxed earlier);

•Deduction to the extent of employee contribution towards EPF is claimed while computing total income for the respective years of contribution.

•Interest on employer’s and employee’s contribution to EPF (to the extent not previously taxed)

The tax liability will be determined by including the said income in the taxable income and based on the tax rates applicable for the earlier years of the respective contributions made without considering the exemption/deduction claimed (as the fund is a non-recognised provident fund).

The tax liability arising on the basis of the above computation as reduced by the taxes already paid in the respective years should be reported and offered to tax in the return of income for the year of return.

There is no need to amend a previous year’s tax return to report this income. Any tax deducted at source (TDS) at the time of withdrawal can be offset against this liability.

Parijad Sirwala is Partner and Head, Global Mobility Services, Tax, KPMG in India.