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EPF Withdrawal Rules: Don’t withdraw from PF before 5 years of service – Here’s why

Sunil Dhawan
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EPF Withdrawal Rules 2019: If you are a salaried person and looking to leave your current job, there are tax implications that you need to be aware of. The monthly contributions made by a salaried individual towards the employee’s provident fund (EPF) come with several tax benefits. On leaving a job, those tax benefits may get reversed if you make EPF withdrawals after resignation.

The crux of the tax implications will depend on the number of years of service one has worked before leaving a job. The EPF withdrawal rules take into account ‘5 years of continuous service’ for the purpose of taxation. Here, continuous service means working in one or more than one job without any break in PF membership.

For example, if an employee works for 1 year for company A and then joins Company B where he works for another 3 years. He then joins Company C and works there for 2 years. Every time, he shifted jobs, he transferred the PF account to the new employer. Therefore, his total service will be counted as 6 years.

Tax on PF withdrawals

On withdrawing PF after 5 years of continuous service, there are no tax implications. PF maturity amount is tax-free in the hands of the employee in the year of withdrawal.

However, if someone withdraws the PF amount before 5 years of service, there are tax implications on 4 fronts:

1. On employee contribution

2. Interest earned on employee contribution

3. On employer contribution

4. Interest earned on employer’s contribution

1. On employee contribution

Tax status: Employee’s contribution qualifies for section 80C tax benefit.

PF withdrawal before 5 years: If one has availed section 80C tax benefit on employees contribution, it has to be rolled back. The amount of tax benefit has to be added to one’s income. It will be treated as ‘Income from Salary’ in the year of receipt, however, taxed as per the tax rate in the year when the benefit was availed.

2. Interest earned on employee contribution

Tax status: The interest earned is tax-free.

PF withdrawal before 5 years: The interest earned on employee’s contribution is tax-free in nature. However, in this case, the amount of interest earned will have to be rolled back in the year of PF withdrawal.

3. On employer contribution

The amount of employer’s share towards EPF is also to be added to one’s income and becomes taxable under the head ‘Income from Salary’.

4. Interest earned on employer’s contribution

Tax status: The interest earned on the employer’s contribution is tax-free.

PF withdrawal before 5 years: The amount of interest earned on the employer’s contribution also gets added to the total income of the year and taxed.

PF withdrawal after 5 years is tax-exempt provided the employee has maintained PF membership continuously for five years. Therefore, every time you wish to change job, make sure to go for PF transfer rather than PF withdrawal.