Provident fund is an important part of retirement planning of any person. You can not only get deduction in income tax by investing in provident fund, but you can also secure the life after your retirement.
Both Fixed Deposit and Provident Fund are investment options in which a common man invests the most in his life. Both these types of investments give you a fixed return, but both have the most important differential taxation.
Because the interest received from fixed deposits is taxable, while the return from provident fund (PF) is tax free. But, while withdrawing money from provident fund, if the rules of Income Tax Act 1961 are not followed, then this investment can be taxable for you. So while withdrawing money from provident fund, you must follow some rules of income tax, otherwise you may face trouble later.
In today’s article (income tax on EPF withdrawal) we will discuss about PF Withdrawal Rules.
Types of Provident Fund–
How many types of provident funds are there?
Before investing in a provident fund, you need to know which types of funds you are investing in. Because it is determined by the type of provident fund, whether the interest and contribution you receive will be taxable.
The Provident Fund is divided into 4 types –
- Recognised Provident Fund (RPF) – Such funds are recognised by the Income Tax Commissioner. These funds can be invested by both the employer and the employee.
- Unrecognised Provident Fund (URPF) – These funds are not recognised. It can also be invested by both employers – employees.
- Statutory Provident Fund (SPF) – The Provident Fund Act, 1925 applies to these funds. It is for the employees of government, semi-government institutions, railways, local bodies, universities and all types of recognised educational institutions.
- Public Provident Fund (PPF) – It is operated by the Public Provident Fund Act, 1968. Salaried and business person can also be invested in this. It is necessary to invest minimum 500.
Can income tax deduction of investment in provident fund be taken?
Investment in the Provident Fund can be claimed under Section 80C of the Income Tax Act 1961. The maximum deduction can be taken is 1 lakh 50 thousand, which will be given in the limit of 80C.
How will the tax be levied on withdrawal of deposits in the Provident Fund? income tax on EPF withdrawal. On withdrawal of the amount deposited in the provident fund, we will treat tax treatment based on the types of funds.
Recognised Provident Fund (RPF) –
This fund is contributed by both the employee and the employer. As much contribution is made by the employee in this fund, the same amount is contributed by the normal employer.
Employee receives deduction of his own contribution in section 80C, whereas no deduction of contribution of the employer is received.
RPF withdrawal is separated into 4 types –
- Employee contribution – deduction can be claimed in section 80C.
- Interest on employee contribution – Interest received on maturity is tax free.
- Employer contribution – If more than 12% of salary is contributed by the employer, then more than 12% amount will be taxable in salary head. The amount received on maturity of the provident fund will be tax free.
- Interest on employer contribution – 9.5% P.A. Interest received over Rs will be taxable. Interest received on maturity will be tax free.
Note: Basic salary + DA (forming part of retirement benefits) +% of turnover (if any) will be taken in salary.
What will be the tax treatment on withdrawal of money 5 years before RPF?
Withdrawal of money from Recognised Provident Fund, the contribution of the employer and the employer and the interest earned on it is tax free. However, if the employee withdraws money before serving for 5 consecutive years, the maturity money received in this case will be taxable as given below –
- Employee contribution – Employee contribution will not be taxable, but if the employee had claimed deduction in section 80c earlier, then the employee would have to pay additional tax for the years in which 80c deduction was claimed.
- Employer contribution and its interest – It will be taxable in the “salary” head.
- Interest earned on employee contribution – “income from other source” will be taxable in the head.
How will the employee’s 5-year service be calculated?
If an employee joins another job after quitting one job and transfers the balance of the provident fund to the provident fund to be maintained with the new employer, So the period of job done by the employer with the old employer will also be added to the service of 5 years.
Unrecognised Provident Fund (RPF)
The amount received on maturity of such fund will be fully taxable, 5 years rule will not be followed.
Taxation will be done in this way –
- Employee contribution – will not be taxable and this investment will also not be exempted under section 80C of Income Tax Act.
- Employer contribution and interest – Taxable in “Salary” head.
- Tax on interest on employee contribution – “income from other source” head.
Statutory Provident Fund (SPF) and Public Provident Fund (PPF) –
The deduction of the amount invested in both these funds can be claimed in section 80C and the amount received on their maturity is completely tax free. There is no limit of 5 years. Can TDS also be deducted on withdrawal of money from Employee Provident Fund? TDS on EPF Withdrawal –
- Contribution is done by both the employer and the employee in the Employees Provident Fund. Many people believe that EPF Withdrawal exempts from TDS provisions, but this is not the case.
- TDS is deducted under Section 192A of the Income Tax Act 1961 on withdrawal of money from Employees Provident Fund, if certain conditions are met.
These conditions are –
- Employees withdraw money from employees provident fund without completing 5 years of continuous service; And
- The amount withdrawn should be more than 50 thousand.
If both these conditions are met, TDS will be deducted in section 192A. The minimum investment limit of 5 years has been fixed so that employees can be motivated for long term investment.
TDS rates and other rules –
- TDS will be deducted at the rate of 10%.
- TDS will be deducted at maximum marginal rate in case of not providing PAN number by the employee.
- No TDS will be levied for withdrawing less than 50 thousand.
- Employees will be deducted TDS at the time of payment.
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Dr. Vibhor S Agarwal has a Ph.D. in IPR, start-ups, and corporate law, as well as an MBA in finance from NMIMS Mumbai, and achieved numerous certifications in corporate law. He is a practicing corporate lawyer and the founder of two business verticals. He has advised over 2000 businesses, 5000 students, and 400 new start-ups all over India and other countries like Dubai, London, the USA, and Qatar. Dr. Viibhor Agarwal assists people with business expansion and branding, regardless of size, as well as business setup, financial literacy, start-up guidance, licensing, tax planning, and other legal compliance issues. Dr. Viibhor Agarwal’s goal is to provide complete financial and business literacy to all businessmen who want to start new businesses and grow existing businesses and to those students who want to open their start-ups. In each video, Dr. Viibhor Agarwal not only explains the method of the solution but also advises subscribers on practical tips learned from and faced by clients handled by Dr. Viibhor Agarwal daily. This blog portal provides you with an easy and clear solution to your business problem, allowing you to take your business to the next level.