We have discussed the withdrawal facility for three major retirement products- Employee Provident Fund (EPF), Public Provident Fund (PPF) and National Pension System (NPS) in previous articles. Now let us understand the tax implications for such withdrawals.

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Public Provident Fund

This offers tax exemption at all stages. The money invested gets you deduction under Section 80C. The interest accrued on the PPF account gets you exemption under Section 10.

If you take a loan from the PPF account, the interest on such loan can be claimed against your business income if funds are used for your business. However, if funds are used for personal purposes, no tax benefits are available.

The money withdrawn partly or fully before completion of its original tenure of 15 years is also fully exempt in your hands. Maturity proceeds are also fully exempt. The exemption in respect of interest is available during the currency of the original tenure of 15 years of the PPF account, as well as during the extension period. In case the PPF account is not extended, but maturity proceeds are not withdrawn fully at one go and the balance earns interest, then this interest too is exempt.

Employee Provident Fund

The money withdrawn from EPF for permitted purposes is fully tax exempt. If you withdraw money on account of losing your job or because you have not received salary, that too is exempt. But the condition is that the money should be withdrawn after you have contributed to the EPF account for minimum of five years. It is not necessary that the contribution to the EPF account should have been made under the same employer. Even if you had changed jobs and had transferred the EPF balance to the account under the new employer, the money withdrawn would still be exempt provided it meets the condition of five years of contribution.

In case the EPF balance is withdrawn before five years, the entire money received becomes taxable in the year in which it is withdrawn. However, in case the money is withdrawn before five years on account of termination of services of the employee due to illness or closure of the business, the money withdrawn would still be tax free. Likewise, in respect of money withdrawn from EPF and transferred to National Pension System would also be fully tax free.

If money is withdrawn before five years, the payer of the money, that is, employer, will deduct tax at source @ 10% in case the aggregate amount of such balance exceeds Rs 50,000. The money withdrawn at the time of retirement is fully tax free in your hands. However, in case you do not withdraw the full balance at the time of retirement, any interest credited to your EPF account after retirement/resignation will become taxable in your hands according to a recent ruling of an income tax tribunal.

NPS

Money withdrawn from NPS account at the time of retirement or reaching 60 years is exempt up to 40% of the accumulated balance. The subscriber has to buy annuity from an insurance company to the extent of 40%. For the balance 20% the subscriber can either buy annuity or withdraw it and pay tax on it. As the scheme allows you to withdraw the money in full if the accumulated corpus is less than Rs 2 lakh, you still have to pay tax on 60% of such withdrawals, as only 40% of the accumulated balance is exempt.

However unlike EPF where the money partially withdrawn is fully tax exempt, the partial withdrawals from NPS account are exempt up to 25% only and the balance 75% will become taxable in your hands.

Balwant Jain
(The writer is a tax and investment expert)

This article was first published in DNA Money: PPF tax-exempt if withdrawn early, EPF/NPS not