Employees Provident Fund (EPF) Withdrawal: Rules and Taxes

Introduction:

The Employees Provident Fund, more shortly known as EPF (not to be confused with Environmental Protection Fund) is more or less a pension scheme which you pay for yourself when you hold a job in the corporate sector. Your employer matches the donation that you make monthly. When the employee retires at the age of 55, he or she gets the lump sum of donation as his retirement fund.

What is the EPF?

The EPF is the main provision of the Employees Provident Fund and Miscellaneous Provisions Act, 1952. It covers corporations that have a strength of 20 or more employees and in certain conditions with certain requisites and exemptions, organizations that employ lesser than 20 employees are also included in this scheme.

Employees with a salary above 15000 as a base salary aren’t allowed to be a part of the EPF scheme. However, they can be a part of the EPF scheme by getting permission from the Assistant PF Commissioner and also coming to an agreement with their employer.

Employees who have an income lesser than 15000 are supposed to mandatorily enlist in the EPF scheme. The employee pays about 12% of his income while the employer matches the 12% the employee pays by contributing from the basic wages, dearness allowance and allowing retaining allowance. Employees of organizations that employ less than 20 people are made to pay a share of 10%. Employees can pay more than the stipulated amount but the employer doesn’t have to match any excess contribution.

It is however wrong to assume that the entire amount the employer pays goes to the EPF. A portion of the employer’s amount is retained in the Employees’ Pension Scheme (EPS). For employees who have a salary of 15000 or above, 8.33% of 15000 is calculated and is retained in the EPS. The rest of the amount is put in the EPF kitty of the employee. For employees who have a salary lesser than 15000, 8.33% of the total amount is calculated and retained in the EPS. At the beginning of retirement when the employee withdraws his/her funds, he or she gets all of the money, both of the EPS and the EPF along with interest calculated on it[i]

Withdrawal of EPF

EPF can be withdrawn even before the age of retirement when there is a dire need of funds, although this practice is discouraged so that the retirement life of that person is not affected.There can be a variety of reasons for their child’s marriage or a medical emergency and any other. For a normal retirement phase withdrawal, the employee has to be 55 in age. However, when he/she attains the age of 54, he/she can withdraw 90% of their amassed balance along with accrued interest. Before the age of 55, if an employee is out of employment for 30 days, he or she can withdraw 75% of the amassed balance and withdraw the remaining 25% after another 30 days. This was a new rule that was brought in to change the old rule that said 75% of the amassed balance can be withdrawn only after not being employed for 60 days

To facilitate the withdrawal of money, employees must use a Universal Account Number (UAN) based form 19 which would in-turn bypass the need for the employer’s signature. The UAN contains the member ID of the employee and in case the employee has worked in multiple firms, each of the firms would give him a separate member ID to which the EPF scheme is transferred.

Requirements for Withdrawal

The basic requirements for withdrawal of EPF are the UAN of the employee, Employee’s Aadhar number be linked with the EPF, and the bank account linked with the EPF to be the same as linked with the Aadhar too.

The process for claiming of withdrawal of EPF is a simple one. The employee must first log-in to the EPFO portal and choose the correct form (form 19) from the dropdown menu in the online claim section. Then, he/she must enter their bank account details and make sure that the bank account that they linked with their EPF is the same as the one they linked with their Aadhar.

Once they agree to the terms and conditions, they need to choose an eligible reason for the withdrawal of EPF. There is a chance that the employee would be asked to enter their passbook details in case they file for ‘Advance claim’.  Once the relevant details are entered and the terms and conditions are agreed all over, an OTP is generated and has to be entered. Once this is done, the claim document is submitted for verification.

The status of the claim document can be tracked through the ‘Track claim status’ option. The EPFO portal will undergo a verification process and then after being satisfied, will process the claim application and the amount will be credited to the bank account that is linked with the UAN and Aadhar[ii].

Required Term for Withdrawal

To avoid tax impositions on their EPF withdrawals, employees are requested to have completed five years of continuous service. It isn’t required that the employee needs to have worked at a single place for the entire five years. He/she can work in two or more places, but must have worked for five years continuously. A 2.5-year term at one place and another 2.5-year term at another place is considered as five years continuous service and therefore is now exempt from tax imposition during withdrawals.

The UAN has simplified this process by generating one account number for an employee throughout his/her life.

The first step in the process of transfer of PF is to check for the eligibility for transfer claim by logging in to the e-SEWA portal. Once you know that you’re eligible, the PF numbers of your previous and current employer needs to be entered. This claim must be attested by either your previous or current employer. Once the transfer claim is submitted, it has to be tracked through a tracking ID provided by the portal. The form that is generated next is known as Form 13 and a physical copy must be made and signed by your current employer. This will complete the process of the transfer of PF[iii].

Tax on Withdrawal of EPF

Tax is applied to withdrawal of EPF only when the employee tries to withdraw his/her EPF before the completion of five years of continuous service. Even this rule can be bypassed by applying for transfer of PF when switching jobs.

In the case that there is a need to withdraw PF by the employee before the completion of the five-year continuous service, a tax of 10% (Tax deducted at source [TDS]) is levied on the withdrawal amount. The employee is exempt from the imposition of this tax if the PF withdrawal amount is less than 50,000. The employee is also exempt from this tax imposition if his/her employment is terminated by their employer due to the shutdown of the company or for any other reasons that are beyond the control of the employee. Considering the income of that year, if there is no taxable income, the employee can submit Form 15G and avail exemption from the TDS. In the case that the PF withdrawal applicants are of age 60 and above (senior citizens), then the submission of Form 15H is enough to avail tax exemption ^{[[iv]] [[v]]}.

Conclusion

I’d like to conclude the article by summarising that, EPF is simply known as a future planning pension and is a means to make corporate employees enjoy a stable life after their retirement, provided a few conditions are fulfilled.

---

References:

[i] https://economictimes.indiatimes.com/wealth/earn/all-about-employees-provident-fund-scheme/articleshow/58906943.cms?from=mdr

[ii] https://www.bajajfinserv.in/insights/how-to-withdraw-pf-amount-online-in-5-simple-step

[iii] https://economictimes.indiatimes.com/wealth/earn/how-to-transfer-epf-online/articleshow/58869264.cms

[iv]https://www.livemint.com/Money/f7VG5qw9JC9Tqpg2RMVtzJ/EPF-withdrawal-Income-tax-TDS-rules-and-other-details-expl.html

[v] https://www.livemint.com/Money/yvH1S1LBR8T4chWDHMr8xN/If-PF-withdrawal-amount-is-less-than-Rs50000-TDS-is-not-ap.htm