Tax on Premature EPF Withdrawal

POSTED BY Subrata Bera ON July 7, 2013 8:29 pm COMMENTS (14)

Hi Friends,

I need your expert advice on the following scenario where I’ve withdrawn my EPF amount after a long failed effort to get it transferred.

I worked in an organization from Oct 2008 to Jan 2010 and then moved to a new organization. After trying for two long years to transfer my EPF account, I finally decided to withdraw it and got it credited in my bank account on 7-May-12. It was credited as lump sum amount and I don’t have details of employee / employer contribution and interest received.

Now I am in a process to file my IT return for FY 12-13. I belong to 20% tax slab. Please help me with calculating the tax liability for this EPF amount.

Thanks & regards,

SB

14 replies on this article “Tax on Premature EPF Withdrawal”

  1. RangaRao A says:

    I was working in India from December 2011 to September 2014 in a company. I have resigned on health grounds quoting that I will not be able to work anymore.

    Then I have come to UK on a job(from Sept 2014). I am no more working in India. My PF amount is about 9.5 Lakhs. I would like to withdraw the amount.

    Because the term is less than 5 years, I understand that the amount is taxable. But since I do not have any income in India, do I really need to pay any tax?

    I also understand that the Employee’s contribution benefits towards 80C will be reversed now.
    I have submitted documents like LIC premium, Principal from home loan etc – all including comes to more than a lakh – for 80C. But my tax dept as a matter of convenience for them have considered my EPF amount for 80C – which is more than a Lakh. This happened for all 3/4 financial years. The PF dept of my company now says that they will have to cut all the above benefit – which is coming to be 1.2 Lakhs.
    The tax dept of my company are asking me to submit the revised ITR V and avoid the above cut of 1.2 Lakh.
    But there seem to be some restrictions on this now. And also I don’t have much clue on how to do this – Could you throw more light on this.

    What are the ways to avoid this tax – any part of the tax related to this EPF withdrawal?

  2. Subrata Bera says:

    Thanks Bunker / Mohit for continuing this discussion and for your valuable suggestions.

    Thinking logically the tax should be paid in the financial year in which the amount is earned. In this case I’ve earned EPF amount (Both employer and employee contribution + interest) in all the financial years from Oct 2008. Therefore as per logic the tax is due in all FYs according to the tax slab in that FY.

    In such case I’ve to calculate tax in each FY adding the amount to that year’s earning and deducting any benefit which I received in that year due to 80C, which can be very difficult. I should use form 10E to pay remaining tax for all previous years.

    Now if a loyal tax payer wants to pay his tax without going through all the hassle, there should be some alternative. 30.3% flat payment is like punishing someone who is loyal and honest. People will tend to steer away from paying any tax than to pay such amount.

    Quite disappointing.

    1. Mohit Pandey says:

      True Subrata, this is the bitter truth. This is the reason most of people never declare EPF withdrawal money in their return.

      As per law you can withdraw EPF only after retirement or if you are unemployed for 2 months, but everyone is violating this law.

      @Bunkar:- see the below not mentioned in form 19.

      Note: Please enclose Form 16 issued by Company for all the years of service if your PF membership period is less than 5 years to compute appropriate Income tax on PF Settlement. Non – submission of Form 16 would attract Tax deduction at maximum tax slab rate.

  3. Bunker Guide says:

    Why is the concept of TDS on PF withdrawal coming here? Employee filed for PF withdrawal, EPFO credited the PF amount in bank account in FY 2012-13 without deducting any tax.
    Then the tax liability on such amounts will have to be adjusted with the income on Form 16 given for FY 2012-13? Why you will need previous years Form 16 of previous employers?

    1. Mohit Pandey says:

      Bunker, If EPF is maintained by company trust then it is mandatory for them to deduct TDS if total accumulation period is less than 5 yrs. This is not applicable if EPF is maintained by EFPO.

  4. Bunker Guide says:

    I believe, EPF + EPS amount withdrawn in less than 5 years of employment is entirely taxable in the FY the two amounts were credited to your account. The amount of tax required to be paid would be the highest tax slab you fall in. In your case, 20% is what you mentioned.

    Take Form ITR-1 if that is applicable to you, enter details of your income as per Form 16, enter TDS details, and then enter the total of EPF + EPS that came in your account in the month of May-2012. Enter that amount in “Income from Other Source”. Press “Calculate Tax”. The column “Tax Payable” will display the tax that is due on the additional income for that year. Break that amount into Income Tax and Education Cess 3% and pay that amount online.

    If you find this difficult, better contact a CA who will do “Computation of Income” and “Computation of Tax Liability” manually and tell you the amount that you need to pay as tax.

    Hope this helps.

    1. Mohit Pandey says:

      Bunker,

      If you have to pay tax as per current slab that why there is the purpose of TDS.

      As I got information from my company’s EPF trush that:-

      1) TDS will be computed based on your previous years Form 16.
      2) In absence of previous years Form 16, TDS will be 30.3 % flat.

  5. Mohit Pandey says:

    You are always welcome Subrata.

  6. Subrata Bera says:

    That sounds scary Mohit. Better try to get the tax details for previous years and calculate a rough estimate. This will atleast save some of my hard earned money.

    I am assuming that after calculating the taxable amount, I’ve to give tax based on that year’s percentage basis and not current FY tax slab.

    Thanks for all your help and guidance. I’ll also try to consult some tax expert to dig more into it.

  7. Mohit Pandey says:

    Dear Subra, Its common man who suffer always….

    Unfortunately the shortcut to avoid the hassle is very costly (30.2% flat tax)…

    If you don’t have Form 16 for those year then please try to get TDS information from form 26A from income tax website using your PAN….sorry to say but if you don’t have TDS information that the total amount would be tax flat 30.2 % (this information I got from my finance department)….

    Its batter to consult some tax expert who can help you on this…..

  8. Mohit Pandey says:

    Dear Subrata,

    As per my understanding you have to perform 3 steps for that for all the years you were in the company :-

    1) TaxWithout PF:- This you will get from Form 16 from the corresponding year.

    2) TaxWith PF:- Compute the total tax again after adding that year’s PF and the interest on PF on last year to your income.

    3) Balance Tax = TaxWith PF – TaxWithout PF

    Add all the Balance tax you will get for all the years that should be your tax on PF.

    This is just rough formula. Consult any finance guy to know the actual number.

    Regards
    -Mohit

    1. Subrata Bera says:

      Thanks Mohit. Those are quite logical options. However, as I do not have Form 16 of that time available readily with me due to recent relocation, I was looking for other alternatives.

      Also I am not sure whether the entire amount will be taxable (Principal + Interest) or do I need to give tax only on Interest part and also at what rate (10% or 20%).

      Calculation of the tax on this amount may be a difficult affair and there should be some shortcut to avoid the hassle.

      Why should a loyal tax payer suffer due to laziness of EPFO people. A faster transfer would have avoided all these issues.

  9. Mohit Pandey says:

    Dear Subrata,

    Does TDS deducted in your EPF withdrawal? If so then ask you previous employer for From 16. you can you this form 16 and show this amount as other income(ITR 1) or saperate (ITR 2).

    If no TDS deducted then you have to compute tax based on your past years form 16.

    Regards
    -Mohit

    1. Subrata Bera says:

      Thanks for answering Mohit. Please find my response below.

      1) No TDS has been deducted by my last company or EPFO. This assumption is based on form 26AS from TRACES.

      2) I left the company in FY 09-10 and got the money in FY 12-13. In this case how can I calculate tax based on previous years Form-16.

      Please suggest.

      Thanks,
      SB.

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