If you just left your job, you can make PF withdrawals before the completion of 5 years of your Employee’s Provident Fund. But those withdrawals are taxable based on the Income Tax Law. Many don’t know how this withdrawal affects your taxes. Now, we’ll get you up to date.
Let’s first start on the basic EPF rules regarding PF withdrawals. EPF rules allow members to withdraw up to 75% of their corpus only after a month of leaving their job. They can withdraw the additional 25% and choose to make a final settlement if they remain unemployed for over 2 months.
Income Tax Laws simply state this. PF withdrawals before five years of service are complete is taxable. You can complete the five years under one employer or more so there is flexibility. But if you withdraw the accumulated corpus after five years, the amount is not taxable.
It’s clear now that any PF withdrawal before five years is taxable in the year you withdraw. But the taxes are not based on the rates of the year of withdrawal. The tax rates that are applicable will the rates in the year you made contributions. Here’s an example to help you understand.
You made EPF contributions between the financial years 2014-15 and 2017-18. Now it’s FY 2018-19 and you left your job. This year you want to withdraw the accumulated EPF corpus. In this case, the PF withdrawal is taxable in FY 2018-19 (AY 2019-20). But the marginal tax rates applied to the withdrawal will be the tax rates between FYs 2014-15 and 2017-18.
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There are four components in contributions – contributions from the employee and employer as well as the interest from both contributions. From these, the employer’s contribution and interest on both contributions are taxable.
The Income Tax Act states that all components of the EPF are taxable if you withdrew before five years. The tax liability will have to be computed for each financial year. So, the accumulated amounts of each year will be at the set rates on those respective years. For example, your accumulated 1 lakh in the year 2014-15 will be taxed at the rate set for that financial year. Your accumulated 1 lakh during 2015-16 is taxed at the rate set for that financial year. And so on and so forth.
Your contribution, which is the employee’s contributions, is taxable. But it depends on whether you claimed tax deductions on your EPF contributions when filing your tax returns that year. Most employees do claim deductions on EPF contributions as a way to maximise their take-home income by saving taxes through these contributions. If you claimed the tax deduction then your contribution is fully taxable. If you didn’t claim the deduction, then your contribution is exempted from tax. But the amounts from the other 3 components are taxable.
There are three cases in which PF withdrawals prior to five years are exempted from tax. If your service was terminated because of ill health, your withdrawal is not taxable. The second case if your employer discontinues his or her business. The third is any reason they determine was beyond your control.
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If you fall in the zero income tax bracket, you must fill out PF Form 15G to ensure that you are not taxed on income accumulations and interest incomes from your EPF. It prevents any tax deducted from source (TDS) on the income you earn from the fund. To avail tax deductions, you need to make a declaration by filling and submitting PF Form 15G in the first quarter of the financial year for both existing and new investments.
Any withdrawal before 5 years have TDS applicable on the amount. However, if your total taxable income with the PF withdrawals is zero, you can make a declaration by submitting PF Form 15G to TDS exemptions. There is an income threshold limit of INR 30,000 with a tax deduction of 10% with a valid PAN card and 34.61% without a valid PAN card.
Additionally, if the accumulated amount is over INR 50,000 and period of service is below 5 years, you can submit Form 15G. This is to avoid TDS for income in that year lower than the taxable limit.
Now, you are up to date with your tax liability in the case of early PF withdrawals. If you withdrew before completing 5 years of service, the withdrawal is taxable. But certain cases allow tax exemptions and different tax rates based on the years you made contributions. Most experts recommend letting your EPF corpus grow for 5 years. And if you choose to let it grow but need quick cash, think about getting a personal loan. It is an easy and hassle-free way to meet your financial needs. Weigh your pros and cons before making a withdrawal and you should be good to go.
Read more about things to know while filing a tax return.
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