What is Employee’s Provident Fund (EPF) and Employee’s Pension Scheme (EPS)
The employee provident fund (EPF) and employee pension schemes (EPS) are popular schemes by the Government of India that aim to promote savings for retirement in case of salaried individuals in the organized sector. Both the schemes are governed by the Employee’s Provident Fund Organisation (EPFO), and cover organizations where the number of employees exceeds 20.
For salaried employees earning salary up to INR 15,000, it is mandatory to contribute towards EPF and EPS and the other employees can opt for the contribution on a voluntary basis. The employee’s contribution is 12% of the basic salary and the dearness allowance and the entire contribution is allocated towards EPF. The employer makes a matching contribution, however, the employer’s contribution to the extent of 3.67% goes towards EPF and the remaining 8.33% is allocated towards EPS.
It is pertinent to note that in case of employees who have started employment after Sept. 1, 2014 with salary above INR 15,000 per month, contribution towards EPS is not applicable. Hence, in such cases, the entire amount of employer’s contribution is allocated towards EPF only.
An employee is eligible to withdraw the 100 percent accumulated amount of EPF on attaining the age of 58 years or if he/she has been unemployed for a continuous period of more than two months.
In case an individual remains unemployed for one month, he/she can withdraw 75% of the accumulated amount of EPF and the balance 25% can be withdrawn if the individual remains unemployed for more than two months.
Partial withdrawal is also allowed during employment to meet specified purposes like marriage, children’s education, construction or purchase of a house, medical reasons, etc. within the prescribed limits.
The eligibility to withdraw and the quantum of withdrawal of EPS depends upon the age of employee and the number of years of service. Below are the broad withdrawal rules in this regard:
When employee has completed less than 10 years of service
- In this case, a lump sum withdrawal is permissible only when the individual has been unemployed for two months.
- The amount that may be withdrawn before completion of 10 years is linked to the number of years of service and shall be calculated as specified in Table D of the EPS scheme. The lower the number of years of service, lesser would be the amount that would be returned to the individual.
- Alternatively, in case the employee does not wish to withdraw the amount accumulated towards EPS, he/ she may also opt to receive a “scheme certificate”. In case an individual takes up employment at a later date, then the service as per scheme certificate would be applied to calculate the total service tenure and eligibility for pension disbursal.
When employee has attained 50 years of age and has completed 10 years of service
An early monthly pension is permissible after 50 years of age when an individual has completed 10 years of service and leaves employment. In such a case, the individual would be eligible to receive a reduced pension as per the slabs defined under the EPS scheme.
When employee has attained 58 years of age and has completed 10 years of service
In this case, the individual would be entitled to 100% of the eligible pension which would be paid on a monthly basis.
When employee has attained 58 years of age but has not completed 10 years of service
- In this case, the individual would be eligible for proportionate withdrawal as per the EPS scheme, once he /she attains the age of 58 years.
- The amount of money that will be returned will be based on the number of years of service and shall be calculated as specified in Table D of the EPS scheme. The individuals in this category are not eligible for monthly pension.
Withdrawal Process: Key Considerations for Approval
EPF or EPS withdrawal is facilitated online through the member e-SEWA portal of EPFO (https://unifiedportal-mem.epfindia.gov.in/memberinterface) or through the UMANG mobile app. Before applying for EPF/EPS withdrawal, the following points should be taken care of:
- All the accounts from any previous employment are merged into one account.
- The Universal Account Number (UAN) should be linked to the Aadhaar number. This is necessary for an online service facility on the member e-Sewa portal. In case the UAN and Aadhar are not linked, the member needs to visit the Regional Provident Fund Office to submit the withdrawal claim form, together with a copy of the canceled cheque and other required documents.
- All the know your customer (KYC)- related formalities should be completed before placing the withdrawal request. Permanent account number (PAN) is a mandatory requirement for KYC. The employee’s personal information as per the EPF records like date of birth, father’s name, etc. should be aligned with the proof of identity.
Process to Withdraw EPF/ EPS
- After logging in the member e-seva portal, employees can select the ‘Online Services’ tab in the menu. The EPFO has launched a composite form i.e. one single form that can be selected for all categories of withdrawal for EPF or EPS.
- Based on the type of withdrawal, employee can select the applicable Form number to submit the withdrawal claim i.e.
- Form 19 for final EPF settlement; or
- Form 31 for PF advance; or
- Form 10C for withdrawal of accumulated pension contribution before completing 10 years of service; or
- Form 10D in case of monthly pension withdrawal after 50 to 58 years of age.
- Employees are required to verify employment details, employment status and other KYC requirements. Similarly, the employee should ensure that correct bank account information is provided and the bank account should be in the EPF account holder’s name. The claim may also be credited in the joint bank account of the individual maintained with his or her spouse.
- The date of joining and leaving must be updated on the portal correctly. This is done through existing employers or past employers.
- Employees would be required to complete the Aadhaar based verification process to validate and submit the relevant form.
- Once the withdrawal amount is approved by the EPFO, the accumulated EPF or EPS amount shall be deposited in the respective bank account and an SMS for the confirmation of the same shall be sent to the registered mobile number of the individual.
Taxes on Withdrawal of Accumulated Balance of EPF and EPS
(A) Withdrawal of EPF
Conditions for exemption of EPF withdrawal
As per the relevant provisions of the Income-tax Act, 1961 (the Act), withdrawal of accumulated EPF contribution would be considered tax exempt in the following cases:
- In case of individuals who have rendered continuous service of more than five years with one or more employers; or
- Where an employee has not completed five years of service, but the withdrawal is due to specified reasons such as termination of employment on account of ill health of employee or on account of contraction or discontinuation of the employer’s business or any other reason which is beyond the employee’s control.
Conditions for Taxability of EPF Withdrawal
In case the accumulated EPF amount is withdrawn before five years of service, the amount would be considered taxable and is required to be offered to tax in the year in which the withdrawal is made.
Pertinent to note that the accumulated amount of EPF comprises employee contribution and matching employer contribution along with interest credited on such contribution over the tenure of employment. The taxability of different components would be determined as under:
Employer’s contribution – The employer’s contribution forming part of the accumulated amount is taxable in the hands of employees as “salary” income.
Employee’s contribution – In case the employee has claimedanydeduction under Section 80C of the Act in any of the past financial years towards the employee’s contribution to PF, such deduction would need to be reversed. i.e the employee’s contribution claimed as deduction under Section 80C in past years would be offered to tax in the year of withdrawal. Such an amount would be taxable as ‘income from other sources’.
Interest on Employee and Employer’s contribution – The accumulated amount of interest on employee and employer’s contribution is taxable as ‘income from other sources’.
It is important to note that in case the EPF withdrawal is considered taxable and the total withdrawal amount exceeds INR 50,000, the same is liable for tax deduction at source (TDS) at the rate of 10% (20% if PAN is not furnished) as per provisions of Section 192A of the Act.
The withdrawal is not subject to TDS if the member submits Form 15G/ Form 15H with the EPFO. Form 15G (applicable for individuals below the age of 60 years) /Form 15H (applicable for individuals aged 60 years or above) are self-declarations which may be submitted by the individuals declaring that their income is below the taxable threshold and hence, no TDS should be carried out for the amount credited to their account.
(B) Withdrawal of EPS
The monthly pension received from the EPFO is taxable in the hands of the employee as income from “salary”.
Any lump sum withdrawal from EPS, i.e. proportionate amount withdrawn before 10 years of continuous services is also taxable in the hands of employees as income from “salary”.
The accumulated balance in the EPF and EPS accounts can be withdrawn even before the retirement age or 58 years, subject to the rules framed by the EPFO from time to time. The withdrawal process has been made much simpler with the introduction of the online portal and the mobile application.
However, an individual should carefully read the rules relating to criteria or eligibility for withdrawal, quantum of withdrawal, tax implications etc., and ensure that required documentation is available before placing a request for withdrawal of EPF or pension.