No Tax is levied on the amount deposited and withdrawn from the Provident Fund account. This is because Provident Fund account comes under the EEE bracket i.e. Exempt on Investment, Exempted Interest and Exempt on Maturity.
Although no tax is levied on deposits and withdrawals from the Provident Fund, there are some conditions to be followed.
There are several types of Provident Funds and the most popular of them are:-
- Employees Provident Fund
- Public Provident Fund
This article mainly focuses on the Tax on Employee Provident Fund. For Tax on Public Provident Fund – you may refer to this article – Tax of PPF Account.
Tax on Employees’ Provident Fund account
The taxability on EPF can be segregated into three segments, Tax at the time of investment, Tax on interest and tax on withdrawal.
- Tax at the time of Investment
Both the employer and employee contribute a part of their salary to the provident fund account. The taxability of both these contributions is explained below.
At the time of making a contribution the amount contributed by your employer is tax-free if it is within the limit specified, which is 12%. Any amount contributed by your employer over and above 12% is taxable in your hands as ‘Income from Salary’’.
Your contribution towards PF can be claimed as a deduction under Section 80C. Since, the maximum deduction allowed under section 80C is Rs. 150,000, therefore that is the maximum you can contribute.
It is mandatory to contribute 12% but you can choose to contribute more, which will be deducted from your salary. However the deduction that you will get is limited upto Rs. 150,000.
- Tax on interest earned
The interest earned over and above 9.5% is taxable as ‘Income from other sources’.
- Tax at the time of withdrawal
The withdrawal amount of an account consists of the investment/principal portion and the interest earned on it. The taxability of the two differs on the basis of the time of withdrawal.
If the withdrawal is made before 5 years of continuous service, the taxability will be different as compared to if the withdrawal is made after 5 years of continuous service.
- Tax when withdrawal is made after 5 years of continuous service
If you wish to withdraw the amount in your PF account after 5 years of continuous service (membership of the account) then the entire amount including the principal and interest withdrawn by you shall be tax-free. The interest earned with respect to your contribution and your employers’ contribution is exempt from tax.
- Tax when the withdrawal is made before 5 years of continuous service
In case, where the amount is withdrawn before 5 years, the taxability of investment amount and the interest amount is different. Let’s look at it in detail.
1. Investment amount
As we have read earlier the investment amount consists of the employer’s contribution and the employee’s contribution.
i) Employers’ contribution
The entire amount invested by your employer will become taxable in your hands as ‘Income from Salary’ at the time of withdrawal.
ii) Employee’s Contribution
The amount invested by you shall become taxable as ‘Income from Salary’, if while making the investment you had claimed it as an investment deduction under section 80C. If not, then it won’t be taxable, since you would have had paid tax on it while making the investment.
2. Interest amount
The entire interest earned by you on both your (employee’s) contribution and employer’s contribution shall become taxable as ‘Income from other sources’.
Therefore, if you withdraw before 5 years of continuous service then the entire amount invested and earned becomes taxable under different heads of income.
Exception to the rule if withdrawal is made before 5 years
If a withdrawal is made before 5 years of continuous service and the reason for discontinuation of service falls in any of the of the following reasons given below then, it shall be treated as if it was withdrawn after 5 years, i.e. it shall not be taxable.
- Medical Emergency
- Discontinuation of employer’s business
- Reasons beyond the control of the employee
|Withdrawal||Investment Amount||Entire Interest Amount|
|Employee’s Contribution||Employer’s Contribution|
|After 5 years of continuous service||Exempt||Exempt||Exempt|
|Before 5 years of continuous service||Deduction u/s 80C availed at the time of investment- Taxable as Income from Salary.
Deduction u/s 80C not availed at the time of investment- Not Taxable
|Taxable as ‘Income from Salary’||Taxable as ‘Income from other sources’|
TDS on withdrawal from Provident Fund Account
According to the Income Tax Act, if a person is withdrawing less than Rs. 50,000 then TDS shall not be deducted. However, if the withdrawal is more than Rs. 50,000 then it is compulsory for the assessee to furnish his PAN number.
If you are not liable to pay tax even after the addition of the withdrawal amount then you can furnish Form 15G/ 15H along with your PAN number and the TDS will not be deducted.
But if you fall in the tax bracket then you cannot give Form 15G/ 15H, and since PAN is mandatory, upon submitting the PAN, a TDS at the rate of 10% shall be deducted.
However, if you fail to furnish your PAN number with the EPFO authorities, and your withdrawal is more than Rs. 50,000 then the TDS will be deducted at a whooping 34%.
Employee Pension Scheme
A part of the employer’s contribution to Provident goes towards the Employee Pension Scheme. The amount credited in the EPS account can only be withdrawn before 10 years of continuous service after which it cannot be withdrawn and the pension is compulsory.
However, if you withdraw before 10 years, then the entire amount withdrawn by you becomes taxable. And for taxability on retirement please refer to this detailed article here.