Income Tax implication of withdrawing money from EPF

Employee Provident fund scheme was introduced by government as a measure of public welfare and common interest of all the employees. In this scheme both employer and employee are required to contribute to a common welfare fund for benefit of employee.

In this article we shall discuss Income Tax on EPF Withdrawal. But before discussing that, let us know that what are the Income tax deductions available under Income Tax Act for contributing in Employee Provident fund scheme.

Employer Contribution : 12% of basic wages, dearness allowance and retaining allowance is required to be contributed by Employer. The same is allowed as expense under Income Tax Act. But It is important to note that any contribution by employer over and above 12% limit is not allowed as deduction under Income Tax Act.

Employee Contribution : 12% of basic wages, dearness allowance and retaining allowance is required to be contributed by Employee. Deduction for the same is allowed u/s 80C of the Income Tax Act. [Even if the contribution is more than 12%, deduction of same is allowed subject to slab of 1,50,000]

Income Tax implication of withdrawing money from EPF

Withdrawn of EPF Amount.

If Withdrawn is before 5 years of the service, than the Income Tax implication of withdrawing money from EPF are as under :

1.) Employers Contribution is fully taxable.

2.) Employees Contribution is fully taxable if you have availed deduction u/s 80C in the year of investment. Otherwise, fully exempt from tax.

3.) Interest earned on Employee’s & Employer’s Contribution is fully taxable as Income from Other Sources.

However no tax would be applicable if amount is withdrawn from EPF due to below mentioned reasons :

1.) The service has been terminated by reason of the employee’s ill-health, or

2.) Contraction or discontinuance of the employer’s business

3.) Any other cause beyond the control of the employee.

If Withdrawn is after 5 years of the service, than the contribution and interest amount are exempt from Income Tax.

The whole article has been summarized by below mentioned chart:

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