Income tax return (ITR) filing: EPF gives you tax benefit under section 80C, but there is catch

Your Employee Provident Fund contribution allows you a tax benefit under section 80C as per the Income Tax Act. But are you also aware about the tax implications if you withdraw your PF?

Contrary to popular belief, PF withdrawal becomes taxable in certain situations. The income tax rules with regards to PF withdrawal has changed from June 1, 2015 and there is a 10% tax deduction at source (TDS) on PF withdrawal. Let us understand the income tax and TDS provisions with respect to the same: -

Situation 1: PF withdrawal is before completing five continuous of service

If PF withdrawal is less than Rs 50,000:
There will not be any TDS, but if the employee is earning more than the basic tax exemption limit of Rs 2.5 lakh, then he or she has to offer this income in the income tax return  
For calculating the period of continuous services, the period served with the previous employer will also be included

If PF withdrawal is more than Rs 50,000:
There will be a 10% TDS if the employee has furnished PAN and there would be no TDS in case the employee has submitted 15G or 15H form.

Situation 2: PF withdrawal after completing five continuous years of service
There will be No TDS as this withdrawal is completely tax exempt so there is no need to offer it as an income as well.

Situation 3: PF account transfer from one job to other: -
There will be no tax implication in case an employee transfers his PF from his previous employer to the new employer, that will be taken up as continuous service. But in any case, PF withdrawal will become taxable if the employee leaves the job before completing continuous service of five years except for the reason as stated below.

Situation 4: PF withdrawal is not taxable under the given situations, even if it withdrawn before completing five years of continuous service:
-If the employee gets terminated due to his ill health  
-The employer has discontinued his business  
-Or for any reason which is beyond the control of employee

The Important point to note is that your premature withdrawal of PF will attract tax liability unless it is withdrawn due to the above-mentioned conditions.

There are many people who get confused with the TDS part of it, whether there is a TDS or not. If it is taxable based on the tax rules mentioned above, you need to declare it in your return of income and pay tax depending on your tax slab.

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Let's assume that you submit form 15G or 15H to your employer, following which they do not deduct any tax on your PF withdrawal, that is, no TDS at all. But if the PF withdrawal happened in less than five years of continuous service and there is no condition that makes it exempt in your hand (as mentioned in situation 4). In this case, though there is no TDS, you still have to declare it and pay tax accordingly. So, the next time you change your job, don't be in hurry to withdraw PF without understanding the tax implications.

(The writer is chief gardener, Money Plant Consultancy)

Source: DNA Money