When TDS is Not Deducted on EPF?

How much do you know about the taxes you pay each year? Well, if you are someone into business – you know quite a lot of how much deductions you would be giving out. It is not the same case for salaried persons – well, for the majority of salaried people, we never get things done on ourselves, especially when it comes to the taxes (our companies get all of that done for us.) But, if you look at your EPF or employee provident fund, you would know that there is more to it than you can think. Provident funds are one of the biggest investment tools, and they are quite profitable, we need to say. 

But did you know that you pay taxes over your EPF? Well, before we get to that point, let’s start from square one.

What is the Employee Provident Fund?

Employee Provident Fund, or PF as it is more commonly known, is a retirement savings program made available to all salaried workers. It is sponsored by the Government and pays fixed interest.

The Employees Provident Fund Organization (EPFO), a statutory agency established by the Indian Government under the Ministry of Labor and Employment manages the employee provident fund. It was established to manage the required employer and employee contributions to the PF program.

Here are some crucial attributes of the employee provident fund –

  • Today, a lot of businesses provide the PF (provident fund) option. Employees’ Provident Funds Act of 1952 offers two different retirement savings plans for salaried workers: Employee Provident Fund (EPF) and Employee Pension Scheme (EPS).
  • Every employee who receives a basic salary of up to Rs. 6500 is required to make EPF and EPS contributions. An employee may request PF deductions from his pay if his basic monthly wage is more than 6501.
  • The employee contributes the whole 12% of the provident fund account, while the company contributes 3.67%. The Employee’s Pension Scheme receives the employer’s 8.33% residual contribution. It is significant to note that the employer’s payment to EPS is limited to 8.33% of Rs. 6500 (Rs. 541) each month if the employee’s salary exceeds Rs.
  • At the moment, the interest rate on employee pension funds is 8.8% annually. The Central Board of Directors of the EPF is consulted before the Government decides on the interest.
  • The provident fund (PF) account receives 12% of the base salary and dearness allowance from both the employer and the employee. As a result, the total monthly contribution to the PF is 24%.
  • ‍The EPF also provides a nomination option. An employee may designate his or her parents, spouse, or children as beneficiaries of EPS benefits in the case of the employee’s passing. An employee cannot, however, nominate his siblings for the EPF.
  • Section 80 C of the Income Tax Act permits deductions for employee contributions to the EPF.
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‍Taxes on your Employee Provident Fund

Before you go away to withdraw your EPF amounts or use Form 31 to transfer your funds, you would have to know when, where and how much the taxes on your fund would be:

  1. a) In terms of Early Withdrawal: TDS is taken out of the withdrawal when the EPF balance is taken out before five years of nonstop service have passed. When determining the five-year service threshold, previous employment is taken into account and incorporated into the calculation. This means that no TDS is taken into account if you transfer your EPF balance from previous employers to your present employer and have worked for that employer for five years or more overall. Keep in mind that you must calculate the five years precisely; if you are even a few days off, you will not receive a grace period.
  2. b) An unrecognized EPF: You might occasionally be making contributions to a PF, but the fund might not have received the Commissioner of Income Tax’s approval and be regarded as an unrecognized provident fund. A fund must receive a commissioner of income tax’s approval in order to benefit from the income tax advantages of a recognized provident fund. Whether or whether you have served for five years, your withdrawals from an unrecognized provident fund are taxed. 
  3. c) On a temporary position: If you have a contract job or have been engaged on a temporary basis, you are not a permanent employee. Therefore your company is not required to contribute to your EPF. After some time, your employer adds you to the payroll and begins deducting and making contributions toward your EPF contribution. Even if you may have worked for such a company for years, it’s possible that you weren’t a regular employee the entire time. If this is the case – the employer will take TDS from your EPF withdrawal as you haven’t accrued the full five years of PF contributions while on their payroll.
  4. d) The contributions: There is no tax due on this portion of your withdrawal. However, if you’ve previously claimed a deduction for your contribution under section 80C – you might have to pay some additional taxes as if you hadn’t claimed 80C for those years.
  5. e) The employer’s contribution: Both the employer’s contribution and the interest earned on it are completely taxed. It is taxed on your ITR under the heading for head salary. You are most likely to see an entry under salary TDS in your Form 26AS for it when TDS is deducted from it.
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When is Your EPF Not Taxed?

If you are wondering if this is even possible, it sure is. Here are some cases when there is no tax applicable:

  1. a) After Five Years Has Been Completed: If the person has completed five years of nonstop service, EPF withdrawals for EPF recognized by the Commissioner of Income Tax are exempt from TDS. If your EPF amount from the former workplace is transferred to the new employer, the tenure at that employer is also taken into account when calculating the five years. Additionally, such withdrawals won’t be included in the calculation of total income, making them tax-free.
  2. b) Transfers: When money from a recognized provident fund is transferred from one account to another upon changing jobs, the transfer is exempt from TDS and is not factored into the calculation of total income.
  3. c) On Termination: EPF withdrawals are exempt from TDS and withheld from total income if an employee’s employment is terminated because of the employee’s illness, the employer’s business declining or ceasing operations, or any other reason beyond the employee’s control.
  4. d) NPS Transfer: If an employee transfers their full EPF balance to their NPS account, the transfer will be exempt from TDS and not contribute toward their gross income.
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Conclusion

It is quite important for you to know how much taxes you would be paying over your investments, and that makes sure you do not end up with assumptions and presumptions in hand.