Thursday, 31 March 2011

TDS from Premature Withdrawals of P F

Withdrawal of Provident Fund may attract Income Tax. The Income Tax Department recently told EPFO (Employees Provident Fund Organisation) to deduct Tax (TDS) from the withdrawal amount, if the withdrawal happened before completing five years of subscription.

At present Provident Fund investment is also consider as a Tax Saving Investment and the amount invested by the employee (Amount deducted and deposited from the Salary by the employer) is exempted from Income tax up to Rs. 1 Lakh under section 80C.  Most of the exempted investment under section 80C has a lock-in-period of 5 years (ELSS has only three years lock in period)

Provident Fund subscription is meant for satisfying the important financial need including retirement needs of the employee and the Government of India allowed it as an exemption under section 80C. But the subscribers can withdraw the subscription, when they resigned from an employee and it is supposed that they may not work with other employee or may not subscribe it again. But there is an option when the employee changes his/her job, they can transfer their subscription with the old employer to the new employer. Most employees easily withdraw the money by closing the account with the previous employer and start a new subscription with the new employer and it is assumed that the withdrawal is easy than transfer.

In the above mentioned scenario, the Income Tax Department gave this direction to EPFO to deduct tax from such withdrawals.  The interest of Provident Fund Investment is also not taxable. But it is not clear that the Income Tax Department wishes to deduct TDS from the amount invested or the interest part of investment. The amount invested is exempted when the investment is made and the interest is also exempted when the interest is due or credited.

According to EPFO,around 70% of the subscribers withdraw their membership before completing three years of subscription. They may become new employees and when they change the employment, they just withdraw the money. But most of these employees are not even come under tax limit. Those who have an income up to Rs. 160000 (Rs. 180000 as per the budget 2011 proposal) after all exempted investments and allowances, should not pay tax as per the current income tax rule. Most of these employees may not come under tax limit.

In such a case the employee should have a chance to submit from 15H or any such documents to avoid deducting Income Tax from the withdrawals or should fix a limit like TDS from contractors or from TDS from interest, rent payment etc.

Let us hope that this movement may reduce the tendency to withdraw Provident Fund Investment before completing five years and in the case of new employment the chances of transferring PF subscription may also increase.

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  2. Sir ,

    A person has withdrawn PF accumulations before completion of 5 years of continuous service. Tax was deducted on that total amount. Can you please clarify me the following:
    1) Can that amount of tax be setoff against current year taxes
    2) Is there any way of getting back that tax amount either by way of depositing back to the pf of the previous employer or new employer.
    Shall be highly grateful if the above are clarified.
    Thanks & Regards
    Rama Rao

  3. I was working in the Organistion from May 2007 to 28th Sept 2011. I am planning to withdrow the PF as i have joined the another Company. Is this scenario is my Withdrawn Pf amount is taxable ? if yes then how much ? please reply....

  4. i am working with Private Ltd. company. 10 employees salary of our establishment is more than 20000/_ Rs. call mi, can i Lock their salary (6500/-) for P.F. me.

    Executive HR & ADMIN.