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The Employees’ Provident Fund (EPF) serves as a long-term financial safety net for salaried individuals, ensuring they have sufficient savings after retirement. However, many employees are often unsure about the tax implications of withdrawing EPF before completing five years of continuous service. According to the Income Tax Act, early withdrawal of EPF can attract tax deductions unless specific conditions for exemption are met.

Tax Deduction on Early EPF Withdrawal

If an employee withdraws their EPF balance before completing five consecutive years of service, the amount may become taxable. In such cases, the Employees’ Provident Fund Organisation (EPFO) deducts Tax Deducted at Source (TDS) while processing the withdrawal.

• If the employee has provided their Permanent Account Number (PAN), 10% TDS is deducted.

• However, if the PAN is not submitted, the TDS rate increases significantly to 34.608%.

This deduction is applied to the total EPF balance, including both the employee’s and employer’s contributions along with the interest accrued on them.

Situations Where TDS Is Not Deducted

The EPFO provides relief from tax deductions under certain circumstances. Here are the key situations where no TDS is applied:

1. Transfer of EPF Account – When the accumulated PF amount is transferred from one employer’s account to another PF account, no tax is deducted.

2. Termination Due to Uncontrollable Factors – If the employee’s service ends due to health issues, company closure, completion of a project, or any other reasons beyond their control, TDS is not applicable.

3. Withdrawal After 5 Years of Service – Employees who withdraw their EPF after completing five years of continuous employment are exempt from TDS.

4. Small Balance Withdrawal – If the total EPF balance is below ₹50,000 and the service period is less than five years, TDS is not deducted.

5. Form 15G/15H Submission – If the withdrawal amount exceeds ₹50,000 and service is under five years, employees can avoid TDS by submitting Form 15G or 15H along with their PAN details.

How the Service Period Is Calculated

According to EPF rules, the total service duration is calculated by adding up the periods of continuous service under previous employers, provided the EPF balance was transferred from one account to another.

Even if an employee’s job was interrupted due to illness, accident, legal strike, or unpaid leave, such periods are still considered continuous employment. Hence, no tax is levied in those situations, as the continuity of service remains intact.

Tax Benefits of the EPF Scheme

The EPF scheme falls under the Exempt-Exempt-Exempt (EEE) category, which means that contributions, interest earned, and the maturity amount are all tax-free, subject to certain conditions.

1. Contribution Benefits: Under the old tax regime, an individual can claim a tax deduction of up to ₹1.5 lakh per financial year under Section 80C for contributions made to the EPF.

2. Employer’s Contribution: Under the new tax regime, only the employer’s contribution—up to 12% of basic salary and dearness allowance (DA)—is eligible for tax deduction.

3. Tax-Free Returns: If an employee completes more than five years of service, both the interest earned on EPF deposits and the maturity amount are completely tax-free.

Key Takeaway

Withdrawing your EPF balance before completing five years can significantly reduce your overall savings due to TDS deductions and income tax liabilities. However, if you transfer your PF account while switching jobs or face unavoidable circumstances like illness or company closure, you can still avoid taxation.

To make the most of your EPF savings, it’s always advisable to keep your account active and continuous until retirement or at least complete the five-year mark to enjoy full tax exemption and long-term financial security.