New Delhi, November 18: An Employee Provident Fund (EPF) is a long-term investment plan for every salaried person. In this scheme, both the employer and employee invest 12 per cent of an employee’s salary every month into the Provident Fund (PF) account. Although partial withdrawal is allowed, the amount is usually handed over at the time of one’s retirement.
As salaried people, we often switch our jobs in search of better prospective. So, it is important to be aware of the tax implications that are tagged along with EPF. The monthly contributions in the EPF have several tax benefits, which may get hampered if the amount is withdrawn after one’s resignation from a particular organisation.
According to the EPF withdrawal norm, a continuous service of minimum five years is taken into account for taxation purposes. By five continuous years, it is indicated that EPF contributions should be continued during the stated number of years without a break while switching jobs.
Take for example, if an employee works for 2 years in company A and then joins company B where she works for four years, then, with every job switch, the PF account is transferred to the new employer. And in this case, the individual’s total service will be counted as six years.
Here’s all that needs to be known regarding tax implications on PF withdrawals;
- If an individual withdraws from the PF account after five years of service then there will be no tax implications. In the year of maturity, the PF maturity amount is tax free in the hands of the employee. But in case the amount is withdrawn before five years, then there are implications on employee and employer’s contribution and the interest earned on the employer’s contribution.
- An employee’s contribution qualifies for Section 80C tax benefit. Now in the case of PF withdrawal before five years and the employee has availed Section 80C tax benefit, then it has to be rolled back. It will be considered as ‘income from salary’ in the year of receipt.
- Usually the interest earned is tax-free, but when the PF amount is withdrawn before 5 years, the interest earned will also have to be rolled back in the year of withdrawal. The employer’s share in the EPF is also added to the individual’s income and becomes taxable under ‘income from salary.’
- Another factor to consider is that the interest earned on the employer’s contribution is tax-free. But when withdrawn before five years of service, then the amount of interest earned on the employer’s contribution also gets added to the annual total income and taxed. Also, the PF withdrawal after five years is exempt from tax, given the employee has continued the PF membership throughout.
Therefore, it is best advised that an individual transfers the PF membership with every switch in order to save on tax.