How are withdrawals from EPF Taxed?

EPF (Employee Provident fund scheme)

For a salaried person, dependence of his family for financial matters is always a major thought of concern. An expected amount which an employee receives as his monthly salary, is not always enough to create separate pockets for savings and initiating investments. Allocation of salary becomes even difficult, when a major part of it goes to govt treasury in the form of taxes. Having pressure of various tax burdens and household expenses employees has no other option than betraying their organization for raising their monthly pay.

EPF (Employee Provident fund scheme) a proposal by finance ministry, came to be an effective solution to every employee problem in which they could them self contribute a part of their income to get invested in their future savings and also giving the employer an equal chance to fraction some monetary benefit to their employees with a return of getting effective tax saving benefit .

What is EPF?

 EPF (Employee provident fund) is an amount of contribution done by the employee himself and by his associated company towards a provident fund ,which continues till the employee serves the organization and once attaining the retirement age or leaving the organization the employee receives the same as a lump sum amount for supporting his future financial needs .

 Who can contribute? Why should I contribute to EPF?

As a general rule, every organization (structured with more than 20 employees),is required to be registered as an EPFO (Employee provident fund Organisation.)and to contribute a certain sum of their salary distribution to EPF.

Both employer and employee can pool 12% of the basic pay (including DA if any) to RPF(Recognized provident fund) to get EPF tax benefit , while both have the option to contribute more than 12% which is taxable as per law.

In addition to principal amount, interests on these contributions subject to lie between 8-12% which is  compounded annually or monthly and sometimes rise with an economy up thrust, which provides more preference to savings in EPF than investing in other securities.. Thus in a nut shell, it is a preferable investment for securing retirement future with a financial helping hand .

What makes EPF a good tax saving option? What will happen If I withdraw from EPF?

 Section 80C of IT act relies on tax benefits of EPF ,by making contribution of 12% of the basic pay ,a tax free gift to both employer and employee and giving an additional income support to this investment by levying a tax rebate on interest income of less than 8.9%( subject to change timely).

EPF Withdrawal Rules and Tax benefits

 An Employee can as per his preference, leave or change his job giving any time a legible resigning reason to the organization or can retire after termination of his service period. During the course of leaving the organization, he can withdraw the PF amount by giving an application to EPF department which is receivable after certain approvals and a waiting period of approx 2 months from application.

Mostly, employees prefer to with draw their PF amount to finance their special family occasions and health emergencies, in accordance to these govt has also provided some effective ways to help them navigate their savings out of PF :-

An employee

  • can with draw an amount equal to 6 times his basic pay for financing medical treatment of self, children and spouse.
  • Can with draw 50% of the contribution for marriage of self,siblings, children (min period 7 yr service.)
  • Can with draw upto 24 times of salary for purchasing a plot and 36 times of his pay for constructing a new house (min period 7 yr service)
  • Can with draw 12 times of monthly salary for House renovation/repairs.
  • Can with draw a required amount before getting settled to abroad.
  • Can with draw upto 90% of the total savings on attainment of age 54 yr .

Other than fulfilling statutory conditions of EPF a tax paying employee is also subject to certain provisions and compliances of IT act which if complied with care can be beneficial for getting a tax saving withdrawal of EPF Savings like

  • Applying for EPF withdrawal after 5yrs of service commands to exemption of full amount received but if it is withdrawn before, it would be subject to a TDS deduction of 10%(on PAN submission) and upto 40% in other cases.
  • Making contributions to SPF (Statutory provident fund) in case of government employees and only RPF in other cases than investing in URPFs ( Unrecognized provident fund) .

Hope this summary about EPF gave you a better understanding about its conceptual relation with tax saving and some of its related unknown facts.