Thinking of withdrawing EPF funds due to Covid? Know about tax implications
April, 22nd 2021
As part of Covid-19 relief efforts, the government allowed subscribers of the Employees' Provident Fund (EPF) to partially withdraw funds from their accounts. EPF members were allowed to withdraw upto 75% of their provident fund balance if faced with financial stress due to Covid-19 pandemic.
Under the relaxation members are allowed to withdraw either 75% of their funds or three months of their basic salary plus dearness allowance, whichever is lower. Such withdrawals are processed within three days of the claim being made.
During the ongoing Covid-19 health emergency in the country, many are facing financial distress. If you are thinking about thinking of withdrawing funds from your PF account it is important to know the tax implications on the same.
The government has made EPF withdrawals tax-free in the hands of members for withdrawals made due to Covid-19-related reasons.
EPF is a long term investment instrument that helps members to accumulate a retirement corpus. Since the objective of this product is to help subscribers build a good retirement corpus, easy liquidity is a little counter-productive. So premature withdrawals are generally not allowed barring under specific circumstances. Other than Covid-related stress members are also allowed to partially withdraw EPF savings before retirement. These include reasons such as marriage or education of yourself, your siblings, or children or to cover emergency medical expenses for yourself, spouse, children, or dependent parents, repayment of home loan, buying a home or home renovation, etc.
Such withdrawals are allowed after five years of service and are usually tax-free. EPF savings can also be withdrawn after two months of unemployment.
However, funds withdrawn for reason other than Covid stress before the completion of five years of service attract tax. Such a withdrawal if more than Rs 50,000 is taxed at 10% under Section 192A if PAN card is furnished. However, no TDS will be deducted if Form 15G or 15H is furnished.
Tax deducted at source will be a whopping 30% if the PAN card is not furnished. However, if withdrawal is less than Rs 30,000 then TDS is not applied. The member will have to show the receipt in the income tax return (ITR). The deduction claimed on employee contributions under Section 80C will need to be reversed. Showing the receipts in ITR is challenging in the absence of specific provision. However, a taxpayer can show the contribution from the employee and employer under the salary head while interest earned can be shown under the head ‘income from other sources.
It is important to adjust your tax liability by the same amount if TDS was deducted.
There are certain deductions available for EPF withdrawals that reduce the tax to zero even before the completion of five years of service.
If an employee was fired due to ill-health or the employer goes under or withdrawals are beyond the control of EPF member then withdrawals attract no tax even if five years of service is not completed. There are also no tax implications in case PF funds are transferred to another employer in case of job change.