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What Are Tax Liabilities on Premature Withdrawal of Pf?

Updated on April 26, 2020
PrateekJain24 profile image

I had a habit of setting goals, but I was ignoring the most crucial thing. Making small efforts towards progress ultimate result in success.

What is a Provident Fund?

Provident fund plans benefits will be enjoyed by the salaried employees after their retirement. This is also known as Pension fund. This fund collects 12% of salary every month into the Employees' Provident Fund account.

The purpose of such a retirement benefit plan is to gather a significant amount of money. This money is for the employees to meet their post-retirement needs. There is a streamlined notice issued by EPF council. As per the notice, 75% of the pension fund can be withdrawn by employees after one month of unemployment. But the last 25% is transferable after his new employment in the new employer custody.

Types of PF Withdrawal

There are majorly two withdrawal norms.

  1. Final recompense of PF.
  2. Partial recompense of PF.

Employees who wish to exercise any of the above options can raise a request on their EPFO portal. The request should support an application approved by the employer. Withdrawal can be done easily if employees have linked their Aadhaar details with UAN. EPFO does not favour treating PF money as a bank account deposit. The social security benefits under the provident fund scheme can only be driven on specific conditions. Such a condition is a constant contribution towards provident fund by the employer.

Tax Implications on PF Withdrawal

Tax liability arises on the amount that is withdrawn before completion of steady service of 5 years. But any amount withdrawn after completion of continuous service of 5 years is tax-free. Tax implications may differ when an employee gets jobless due to an unsure event such as injury or accident. In such a situation, PF withdrawal by them will not be taxable.

Tax implication will change for employees withdrawing Pension funds before five years of continuous service. Now the amount of principal and interest both will be taxable in the current financial year. Tax rates are divided into two categories. Depending upon employees who have submitted or not, their PAN details to UAN authorities. Flat 10% tax rate is applicable to the amount accrued till date for employees furnishing necessary details. On the other hand, a flat 30% TDS rate is applicable to those employees who haven't submitted their details.

Investment in a National Pension Scheme from PF account is advisable in case of PF withdrawal. Subsequently, withdrawing funds from NPS is tax-free in the hands of employees. This is an effective way to save tax on PF withdrawal.

The continuous phase of service can be deemed when employees switch between the organizations. Therefore, the PF account of the old employer is transferred to a new employer. This will not count as a pause in the employee's service cycle.

Exceptional Cases For Early PF Withdrawal.

Employees can withdraw funds from their EPF accounts in a full or partial settlement. But the withdrawal before retirement is allowed only under the following situations.

  • On attaining the age of retirement.

  • If any EPF account holder has a home loan which they need to repay or foreclose.

  • In order to pay off medical bills.

  • On being jobless for a period of 60 days or 2 months as the case may be.

  • For repairs and alteration of the existing house.

  • To meet marriage or education cost.

Remedy In Case of Incorrect Exit Date.

Sometimes employees omit to enter or wrongly mention the exit date in their resignation documents. In such situations, they might face some adverse consequences of it. This may lead to a delay in their PF withdrawal. Hence to solve this issue here is an effective option. The Employee Provident Fund Organisation (EPFO) has come up with a facility in the form of a Unified Account Portal. Here employees can enter the date of exit from their previous employer. Earlier this facility of entering exit date is available only to employers. Now employees can also add their exit date by their own. By using Unified Account Number (UAN) and password one can easily add the exit date. So always cross verify the entered details. Click on 'Service History' under the 'View on top panel ' tab to verify. In order to avoid any unusual situation in future always do the recheck.

Verdict

There are many retirement plans offered by employers to secure the future of employees. The Provident Fund is measured as the most reliable option among all. An EPF account which is lying dormant for more than 3 years still continues to earn interest on their funds. Moreover, contributory membership of 10 years in PF, ensures life-long pension to the members. Premature withdrawal is another helpful option of PF, and this should be used only in urgency. I hope this article helps both employers as well as employees. Be aware and understand properly the benefits and tax implications of provident funds.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2020 Prateek Jain

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    • Prantika Samanta profile image

      Prantika Samanta 

      11 months ago from Kolkata, India

      Thank you for sharing such an important article. I had several queries regarding PF money withdrawal. Your article has helped me a lot as it throws light on relevant points.

    • Suchismita pradhan profile image

      Suchismita Pradhan 

      11 months ago from India

      Thanks Prateek for providing such an important information regarding PF.keep sharing,keep writing.

    • PrateekJain24 profile imageAUTHOR

      Prateek Jain 

      11 months ago from Madhya Pradesh, India

      Thank you for your valuable feedback on the article Nikhil brother. This is really important information in current time because people are withdrwaing their provident fund without understanding the consequences of it. Everyone must be aware of the practices and procedures of provident fund account handling. Thank you for reading and analysing it in an in-depth manner.

    • sachnikh profile image

      Nikhil Sharma 

      11 months ago from India

      After working in an organization for about nine months, I withdrawn the complete amount from my PF account. It took around 3 months to process the payment into my bank account after applying for the final settlement.

      Yes, you're right, Prateek. One should only withdraw some or complete money in the PF only in case of emergencies, except if you've completed 5 years in a particular organization. I'm gonna share this article with everyone who needs help in knowing the tax rates on PF account. Thank you for writing an informative article bro. Keep up the good work.

    • PrateekJain24 profile imageAUTHOR

      Prateek Jain 

      12 months ago from Madhya Pradesh, India

      Thank you Simran for wonderful feedback. I am happy that you like the article. I will request you to kindly read articles that I have published on hubages because they are really very informative and you will gain an immense knowledge from them. Again thank you and keep reading and keep exploring new things.

    • PrateekJain24 profile imageAUTHOR

      Prateek Jain 

      12 months ago from Madhya Pradesh, India

      Thank you Sourabh brother for taking time to read and comment. I am glad that you liked the article.

    • profile image

      Sourabh 

      12 months ago

      Knowledge rich bolg

      Keep it up

      Anbd thx

    • profile image

      Simran 

      12 months ago

      Prateek Jain, Once Gain You Have Done Great Efforts To Enhance and Upgrade Our Knowledge, I found this article very useful as being into HR profession I have learned about a very essential monetary benefit which act as safeguard for all retired employees to meet their expenses after retirement.This articles covers all important aspects about which every working as well non working also should know. Thanks Prateek For Sharing With Us such valuable article.

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