EPF WITHDRAWAL RULES AND TAXES

INTRODUCTION

The Employees Provident Fund Organisation (EPF) is a statuary body that assists Central Board in administering compulsory contributory Provident Fund Scheme, Pension Scheme, and Insurance Scheme for the workforce engaged in the organized sector in India.

Employee Provident Fund

The Employee Provident Fund (EPF) is governed by the Employee Provident Fund Organization (EPFO), a statutory body under the (Labour Ministry) Ministry of Finance, India. It helps private sector employees to save a small portion of their salary every month. This scheme helps them to fabricate a corpus that is duty excluded for use in the fag end of their lives or retirement. Employee Provident Fund is a long haul reserve funds apparatus, fundamentally went for a calm retirement, salaried representatives may pull back their cash in their EPF record to take into account diverse budgetary prerequisites or at the season of any real-life occasions, for example, weddings, home remodel/adjustment and medicinal treatment among others.

The amount is deposited at the Employee Provident Fund Organization (EPFO). The investments made by a number of employees are pooled together and invested by a trust. EPF covers the following three schemes.

• Employees’ Provident Fund Scheme, (EPS) 1952
• Employees’ Pension Scheme, 1995 (replacing the Employees’ Family Pension Scheme, 1971) (EPS).
• Employees’ Deposit Linked Insurance Scheme, (EDILS) 1976.

Employee Provident fund (EPF) withdrawal Rules

The Employees Provident Fund scheme has become the retirement saving scheme in the true sense. The Labor Ministry of India issued a gazette notification about the changes in withdrawal rules EPF Act, with effect from 10^th February 2016 but it was withdrawn on 19^th April 2016 due to pressure from the various trade unions. The changes brought in by the government were

• The retirement age of an employee increased from the current 55 years to 58 years.
• An Employee can withdraw 90% of EPF balance once he reaches the age of 57 years.
• An Employee cannot withdraw Employer contribution to EPF before 58 years.
• EPF membership does not end with leaving the job.
• Government plans to start an online facility for EPF withdrawal in Aug 2016.

Retirement age increased from the current 55 years to 58 years

The retirement age of an employee was 55 years. From 10^th February 2016, the retirement age was increased to 58 years. In today’s global scenario retirement age is 58 years across all industrial sectors, so this change is keeping in step with times.

Withdraw 90% of EPF balance once an employee reaches the age of 57 years

Earlier the retirement age of employees as per EPF rules was 55 years. Therefore one was allowed to withdraw 90% of his EPF balance one year prior to retirement i.e. at the age of 54 years. With these new rules, the age of retirement has been increased to 58 years, now the employees will not be able to claim withdrawal of their provident fund after attaining the age of 54 years. They would have to wait till attaining the age of 57 years. But the change is that now under this facility, the employee would be able to withdraw 100% of his contribution and interest earned on it unlike 90% of the total accumulations earlier

Restriction on withdrawal of Employer’s contribution to Employees Provident Fund before 58 years. (This new rule has been withdrawn)

s per the notification dated 10^th February 2016 any person who is a subscriber to Employers Provident Fund cannot withdraw the employer’s contribution to EPF before retirement. The employer’s portion can be withdrawn only after attaining the retirement age (58 years).  It is to be noted that the withdrawals from the Employers Provident Fund within five years of joining are still taxable. The problem that the Employers Provident Fund would face is whether it would pay interest on Employer shares which one is not allowed to withdraw.

‘The inoperative account rule of Employers Provident Fund says that an Employers Provident Fund account would not earn interest if there is no contribution for 3 years’. Now onwards, there would be several Employers Provident Fund accounts without contributions as people would not be able to withdraw their full Employers Provident Fund corpus. Will such an account not give any interest after 3 years?

The rule says A member, who ceases to be in employment and continues to not be employed with a covered establishment for at least two months, may be permitted to withdraw only his own share of contribution, including interest earned thereon. The requirement of a ‘two months’ period referred above shall not apply in the case of female members resigning from the service for the purpose of getting married or on account of pregnancy/ childbirth.”

Employee Provident Fund membership does not end with leaving the job

As per the notification dated 10^th February 2016 subscribers to Employees Provident Fund cannot withdraw the EPF contribution by the employer before retirement. The employer’s part can be withdrawn after attaining the retirement age (58 years). Since one can’t withdraw 100% of the PF balance, your Employee Provident Fund account is not closed. As per earlier Employees Provident Fund rules, the membership was linked with employment.

One becomes a member of the Employee Provident Fund with the joining of a new job. Once the subscriber to Employee Provident Fund becomes jobless and withdraws his Provident Fund balance, the membership expires.

But now Employee Provident Fund membership would continue up to the retirement age. The Employee Provident Fund membership has become independent of the job. Since one can’t withdraw 100% of the Provident Fund balance, the membership is bound to continue.

Withdrawal Purposes

Employees Provident Fund is an important part of most salaried persons. It can help one, at times when he is pressed for money in life. If any person has already worked for years like 5-20 yrs., he must have accumulated a good amount in his Employee Provident Fund account. Such employees may withdraw money from their Employee Provident Fund accounts for various purposes, subject to certain conditions. Individuals have to furnish several documents in addition to meeting the eligibility criteria as per Employee Provident Fund withdrawal rules.

Those major landmarks in life or reasons for which an employee can take out the money from his Employee Provident Fund account

• Marriage Purpose of Self, Sibling, and Children
• Education Purpose of Self + Children
• Repairs/Alteration of Existing House
• Repayment of Existing Home Loan
• Purchase/Construction of House or Flat
• For Medical Treatment
• Miscellaneous

Tax Implication on Employees Provident Fund Withdrawal

Tax on Employees Provident Fund money withdrawal is the main concern of the employees who leave early. Most of us know about the tax-free nature of the Employees Provident Fund. The Employee Provident Fund is also considered the most reliable retirement corpus. There is no chance of default.

Subscribers will get a better interest rate and no one can take away provident Fund corpus.  Besides this Provident Fund is totally tax-exempt. We have a common perception that Employees Provident Fund does not have any tax tension.

But, very few of us know that the Provident Fund corpus can also be subject to the ‘tax cut’. The Provident Fund balance can be reduced by 34.6%. One may only get 65.5% of Provident Fund money. The TDS (tax deducted at source) can dent the PF balance severely. There is a provision of the tax on the premature withdrawal of the Employees Provident Fund.

Tax Treatment of Different Provident Funds

There are four types of provident funds, which give tax concessions. 

Salary for this calculation includes the following components

• Basic salary,
• Dearness allowance
• The commission is based on a fixed percentage of turnover achieved by the employee.

Tax Benefit of Employees Provident Fund

As mentioned in the table, the Employees Provident Fund enjoys many tax benefits.  The Employees Provident Fund saves your tax in the following ways:

1. Employer’s contribution to Employees Provident Fund account is exempt from tax. This exemption is subject to 12% of the employee’s basic salary plus DA.
2. The interest on the employer’s contribution is also exempt from tax.
3. The employee’s contribution toward Employees Provident Fund is also eligible for tax deduction under section 80C of the Income-tax Act.
4. The interest on the employee’s contribution is also tax-exempt.

Tax Benefit Is Subject To Minimum Service Requirement

An investment that gives tax deduction comes with a lock-in period. Except for the ELSS, all other tax-saving investments have a minimum lock-in period of 5 years. So is the case with Employees Provident Fund. The investment in Employees Provident Fund may give tax benefits up to 30%, but it depends upon the tax slab one has been in all previous years.

Therefore, if the employee/s does not complete the minimum investment requirement of 5 years, the above tax exemption and deduction would be void.

Return Back of EPF Tax Benefit

If any employee withdraws from the Employees Provident Fund balance before 5 years of service all his tax savings will become null and void.

• The person has to return back the tax deduction because of the employee EPF contribution. The employee must have taken the 80C tax benefit on the EPF contribution. It is also calculated financially year wise

The interest on PF contribution will become part of other income. It would be added in the tax calculation of every financial year

TDS on Employees Provident Fund

The new TDS rule of Provident Fund is painful for most of the employees as the percentage of TDS that can be deducted are 34.6%. In Income- tax it is said to be the maximum marginal rate. The 34.6% tax is huge, that too for an Employee’s Provident Fund corpus. It would be really very frustrating if one gets Employees Provident Fund money after such a big deduction.

Conditions of TDS on Employees Provident Fund Withdrawal

The Employee Provident Fund Organization (EPFO) can deduct tax at source (TDS) only if an employee falls under the following two criteria.

1. The employee has not completed a total of 5 years of continuous service.
2. The EPF withdrawal amount is more than 50,000. (Earlier this limit was Rs 30,000).

Explanation

‘5 years of continuous service mean aggregate service’. The person may have worked in different organizations, but the total service period should be more than 5 years. However, the following points should be considered while calculating the continuous period of service.

• The employee must have transferred the Provident Fund balance of the previous organizations. If you have withdrawn the PF balance of previous employment, the service period of the employment is not considered for continuous service.
• The employee’s previous service period would not be added to the recent service period unless he transfers the previous Provident Fund balance.

However, one can minimize or avoid TDS on Employees Provident Fund withdrawal if you fulfill some requirements

Relaxation of TDS from Employees Provident Fund withdrawal

• If an employee has submitted PAN
• If an employee has given the PAN, the TDS would be 10% instead of 34.6%.
• If Employee has submitted Form 15G/ 15H

If an employee submits form 15 G with the Employees Provident Fund withdrawal form, the TDS would not be applicable. Form 15G/15H is a self-declaration that total income (including Employees Provident Fund corpus) is within the tax-free limit.

No TDS for Most of the Employees

A number of employees leave the job after 5 years of service. Therefore, they need not worry about the TDS of the Employees Provident Fund. The following points need to be remembered:

1. The Employees Provident Fund maturity amount is tax-free if one is engaged in continuous service for more than 5 years.
2. If the service termination is beyond employees’ control. If you are out of a job because of the lockout, retrenchment or medical condition, the rule of TDS would not be applicable

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