Withdrawal from Provident Fund (PF) Account before Completion of Five years taxable?

Provident Fund withdrawal may attract Income Tax. TDS @ 10% will be deducted from the withdrawal amount subject to a maximum of Rs 50,000, if the withdrawal occurs within five years of registration. Tax authorities have enacted a law in the 1961 Income-Tax Act that PF taxes levied by employees before completing five years of contributions to the EPF are taxable.

 In most cases, the accumulated PF balance is deducted at retirement, therefore, it is not taxable at the hands of the individual. However, in some cases such as a change of employment, a person may withdraw the PF balance in advance. The point one needs to keep in mind is that the amount received from such a PF is not taxable in all cases. Only in the circumstances listed below can the amount of money disbursed to PF be eligible for tax deduction.

 If the employee has been continuously working with the employer for five years or more. Also, if the balance includes the amount transferred from the personal PF account held by previous employers (s), then the years of continuous service provided to the previous employer (s) will be entered for the purpose of using a period of five years.

If the employee has not performed continuous work for five years, but the employee is terminated due to ill health or suspension of the employer's business or reasons beyond the capacity of the employee, such fee will be taxable.

Another case of tax evasion is when, when a worker is suspended, the employee gets another job and the balance of the collected PF is transferred to his or her PF account held by the new employer.

In short, when the value of the PF is deducted before five years of continuous operation, it may be sold in person’s hands as if the fund had not been recognized from the outset. In such a case, the payment received by the person in respect of the employer's contribution and the interest earned on it are taxable as "income". Interest on a service contribution is taxable as "other income". Payments received in respect of a personal contribution are not taxable (up to a level not previously claimed as a deduction).

 
The IT provisions provide that well-known PF executives or any other person authorized by the fund's regulations to make payments to an employee must pay tax when they pay that amount. In addition, the person responsible for paying the tax must issue a tax deduction certificate (Form 16) within the stipulated time to the employee showing the tax deduction details in the accumulated PF balance and comply with other salary-related compliance requirements. So the next time you think about getting rid of your PF, you should also, as an individual, consider whether the same is taxable or exempt.

Drafted By:
CS.A.Maniraj.,B.Com.,ACS.,CA(Fin), Independent Director 
Certified CSR Professional., Certified GST Professional.