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TDS on Provident Fund withdrawals is now a Law

Contrary to popular perception, EPF or Employees Provident Fund is not always tax free. As I had discussed in my blog Caution! Your PF amount may be Taxable, you have to pay tax on the PF balance withdrawn prior to completion of "5 years of continuous service".

In fact, the withdrawal itself is legally not permitted if — within a period of 2 months of leaving one company — you join a new company which is also covered under the PF regulations. Transfer of your PF balance to the new employer is mandatory.

However, till now the Employees Provident Fund Organisation (EPFO) was not very particular about enforcing both these rules.

Henceforth, this would no longer be the case. As per the recent Finance Act 2015, EPFO has to compulsorily deduct tax at source (TDS) on provident fund withdrawals. In this regards, a new Section 192A has been inserted in the Income Tax Act this year.

As per the circular on 'Instructions for deduction of TDS on withdrawal from PF', issued by EPFO, the following provisions would apply. 

Income tax will be deducted at source (TDS) provided
a) accumulated PF balance is equal to or more than Rs.30,000
   AND
b) the service is less than 5 years.

Rate of TDS to be deducted would be
- 10% in cases where is PAN furnished by the EPF member
  OR
- 34.608% (i.e. the maximum marginal income tax rate) if no PAN is submitted

However, TDS will NOT be deducted if the EPF member furnishes Form 15G / 15H with the PAN and the balance withdrawn is less than Rs.2,50,000 (for senior citizens) / Rs.3,00,000 (for others). For higher amounts, Form 15G / 15H will not be accepted.

In other words, TDS will also NOT apply
- Upon transfer of balance from one PF account to another
- If the PF amount is withdrawn after a continuous service of 5 years (including previous employers)
- When the service is terminated due to member's ill-health, discontinuation / contraction of business by the employer, completion of project or any other reason beyond the control of the member
- If the PF payment is less than Rs.30,000 and the service rendered is less than 5 years
- If the PF payment is Rs.30,000 or more [but less than Rs.2.50 lakhs (senior citizens) / Rs.3 lakhs (others)] with less than 5 years of service, but Form 15G / 15H is submitted along with the PAN.

These provisions of Tax Deducted at Source on withdrawals from EPF Account apply w.e.f. June 1, 2015.

EPFO has reorganized itself into a dynamic organization. It now offers many facilities online such as knowing your EPF balance, transfer of your account, withdrawal and much more. The trials and tribulations of the past no longer exist. As such, it is in your best interest to transfer and continue with your PF account, instead of withdrawing the balance.

By the way, as I often mentioned, TDS is NOT be the final tax liability. You have to compute the total tax payable as per your income tax slab rate and then adjust the TDS already deducted against the same.

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