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Tax implications on withdrawal of PF

Let us understanding the tax-ability of proceeds received from withdrawal of Provident Fund.

Condition 1:

Withdrawal of PF after completion of 5 years of service.

Proceeds received from withdrawal of PF from the fund accumulated over a period of more than 5 years is EXEMPT from tax.

Period of employment with all the previous employers shall be included in calculating the 5 years period provided, the old PF account is merged with the new employer. 

Condition 2:

Withdrawal of PF before completion of 5 years of service.

Proceeds received the withdrawal of PF before completion of 5 years of employment shall be TAXABLE.

Let us understand the taxability of PF in details.

PF withdrawn shall have 4 components namely, Employer's contribution, Employee's contribution, Interest on Employer's contribution, Interest on Employee's contribution.

a) Employer's contribution

Contribution made by employer in the accumulated balance shall be TAXED under the head INCOME FROM SALARY. 

b) Employee's contribution

This portion of contribution made by you in the accumulated PF balance is EXEMPT provided you have not claimed deduction for contribution to PF under Section 80C.

To understand, if an assessee has claimed deduction on PF contribution by employee during previous years, then such component of PF withdrawal shall be taxed in the hands of assessee as if deduction under Section 80C was not claimed in those previous years.

If an assessee has proper documentation proving the point that Employee's contribution to PF was not claimed under Section 80C during previous years, then such component is totally exempt.

c) Interest on employer's and employee's contribution

ENTIRE INTEREST earned on contributions made by employee and employer shall be taxed under the head INCOME FROM OTHER SOURCES.

APPLICABILITY OF TDS

A) Amount withdrawn is less than Rs.50000

If the amount withdrawn is Rs.50000 and period of service is less than 5 years, there shall be NO TDS deducted on the proceeds. However, the assessee shall offer such withdrawal as income while filing his income tax return for that year of withdrawal.

B) Amount withdrawn is more than Rs.50000

If the proceeds from withdrawal amounts to more than Rs.50000 and period of service is less than 5 years, TDS @10% shall be applicable. 

Exception to the rule-period of 5 years:

PF amount withdrawn shall be treated as withdrawal after 5 years of service, if the PF is withdrawn before 5 years and the reason for discontinuing the service is 

a)Medical emergency OR

b)Discontinuation of business by employer OR

c)Reasons beyond the control of employee.

Hence, such PF withdrawal will be treated as EXEMPT upon satisfying the above mentioned conditions.

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