Income tax on PF withdrawal: Things you should know

Employee Provident Fund

account comes under EEE (Exempt on investment, Exempted Interest and Exempt on Maturity) bracket of Income Tax Act. Hence, the amount deposited and withdrawn from the Employee

Provident Fund

is tax-free.


However, there are certain terms and conditions of EPF amount withdrawals that you should be aware of. For example, as per Income Tax Rules, if the EPF amount is withdrawn before the completion of five years of employment, such withdrawals will be taxable. The five years of service can be completed either with one employer or more. But note that the PF account maintained with the old employer should be transferred and continued to a new employer.

The EPF amount, if withdrawn after five years of completion of service, will be exempted from tax.

The EPF rule states that a member can withdraw up to 75% of the accumulated fund after one month of quitting a job. In case the person is unemployed for more than two months, he/she can withdraw the remaining 25% and opt for a final settlement.

It should be noted that the EPF is made of four components - employer's contribution, employee's contribution, interest earned on employer's contribution, and interest earned on employee's contribution.

Out of these four, three components - employer's contribution, interest earned on both employee's contribution and employer's contribution - are fully taxable.

However, in the case of EPF withdrawal before the completion of five years, all the four components will be taxable. The tax will be calculated for each of the financial years at the tax rates applicable to the withdrawer in those respective years.

The employee's contribution to EPF is eligible for deduction under section 80C of the Income Tax Act. If you have claimed benefits under Section 80C, it will be taxed as salary and the interest earned will be taxed as 'income from other sources'.

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