If employee withdraws his EPF money before completion of 5 years of service from the date of joining, then he shall be liable to pay tax on such withdrawal and employer also shall be liable to deduct TDS on such withdrawal, unless the conditions of exemptions available under the Income Tax Act and Employees’ Provident Fund Organization (EPFO) are satisfied.
Withdrawal of Employees’ Provident Fund (EPF) amount by employee before completion of 5 years of service from the date of joining will attract tax as per Income-tax Act, 2025 and also TDS (Tax Deducted at Source) unless exempt as per conditions mentioned under Income-tax Act, 2025 and Employees’ Provident Fund Organization (EPFO) rules.
Employees’ Provident Fund (EPF) is a long term retirement benefit but the same can be withdrawn in part in case of unemployment or other emergencies even before retirement. The amount of withdrawal is not restricted but the amount so withdrawn before completion of 5 years of service will be considered as part of income and tax thereon will be charged as per the provisions of Income-tax Act, 2025.
A withdrawal, including the interest amount, could attract tax and TDS if not covered under any of the exemptions as specified under the income tax and EPFO rules. The report was first carried by Mint.
EPF investments currently earn an interest rate of 8.25% on a monthly basis.
EPFO rules define when full withdrawal is allowed
What is Full EPF Withdrawal as per EPFO Rules.
As per EPFO rules, EPF in Full can be Withdrawn by Employee in following cases as specified by ClearTax.
- Retirement after reaching 55 years of age
- Withdrawal of up to 90% of EPF balance after he/she completes 54 years of age i.e. one year prior to retirement.
- Employee is unemployed for only 1 month then he can withdraw 75% of his EPF account.
- Full withdrawal of the EPF balance after the individual is unemployed for a period of two months.
Online withdrawal by EPFO is permitted without approval of employer in following cases.
- Your Aadhaar number must be mapped to your Universal Account Number (UAN).
- Employer verification requirements have been completed
The EPF is one of the largest retirement benefits systems in the country to help working people save enough for their old age by themselves or through their employers. Under the EPF scheme, both the employee and the employer every month put aside 12% of the employee’s basic salary and dearness allowance as their contribution to the fund.
The employer’s contribution to Employee’s Provident Fund (EPF) is credited to Employee’s Provident Fund (EPF) account and Employee’s Pension Scheme (EPS) account.
Early withdrawals may trigger tax liability
Any withdrawal from EPF prior to completion of 5 years of continuous service of employee (as specified under Rule 6 of Schedule XI of the Income-tax Act, 2025) shall attract tax.
The tax implications will however not apply in case the withdrawal is permissible under Exemptions notified by EPFO & Income Tax and are admissible.
Exemptions may apply in cases such as:
- Termination due to ill health
- Closure or discontinuation of the employer’s business
- Circumstances beyond the employee’s control
Tax applicable on Early Withdrawal is available on income tax portal web site. The entire amount of withdrawal along with interest made by employee before completion of 5 years of service and not covered under exceptions in above para shall be taxable and TDS would be applicable on such payment.
All previous service will get counted even if EPF was transferred without any withdrawal.
Once the EPF transfer happens, the service of employee with previous employer(s) can also be counted to complete 5 years of service. No TDS will be deducted by employer on withdrawal of EPF balance (along with the interest accrued thereon), as mentioned by ClearTax in the above article.
TDS rules are mainly based on the amount of withdrawal and PAN details.
Tax deducted at source on EPF withdrawal is a function of the amount of withdrawal and the PAN details of the employee available with the employer.
According to ClearTax:
- No TDS is deducted if EPF withdrawal amount is below ₹ 50,000.
- 10% TDS will be deducted from EPF withdrawal amount if it is above ₹ 50,000 and PAN details are available with employer.
- TDS may also be applicable at a higher rate i.e. 20% if PAN details are not available with the employer.
Employees with total income below the taxable limit (i.e. below the threshold limit for taxation) can also have TDS not deducted on EPF withdrawal by filing the following forms:
- Form 15G
- Form 15H
In any case, Tax to be deducted can be exempted if these forms are submitted validly. In such cases, Tax shall not be deducted from EPF withdrawals even if amount of withdrawal from EPF is in excess of Rs. 50,000 and total of such taxpayer from all sources is in excess of taxable limit for such taxpayer.
Retirement savings remain central to EPF framework
Withdrawals from EPF under focus as salaried employees become more aware on tax, retirement and employment.
The EPF account of salaried employees is being taxed before retirement, due to frequent job changes, unemployment and urgent withdrawals from their EPF accounts.
Most tax experts today do not recommend the withdrawal of EPF savings, for the simple reason that not only do these grow due to interest but also due to compounding. And, savings that have remained in the account for more than 5 years are taxed in a very tax efficient manner.
Moreover, as noted before, workers can withdraw from their own EPF contributions in case they lose their job or are suffering from serious health issues or are facing other similar crises of larger magnitude where they need to withdraw huge sums of money for meeting urgent needs.
A salaried individual must know the service conditions, the time at which withdrawal can be taken and the documentary evidence required for tax purposes before withdrawing his/her EPF savings prematurely.
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