KEY HIGHLIGHTS:

• Any amount withdrawn from EPF before completion of 5 years is taxable
• Up to 75% of EPF balance or maximum three months' salary can be taken as COVID-19 advance
• The COVID-19 advance is non-refundable and tax free even if withdrawn before 5 years
• In case of a job loss, if not completed 5 years, go for COVID-19 advance and not for complete withdrawal
• Since withdrawals will be tax free after 5 years of service, wait for meeting the criteria
• If your taxable income liability including income from withdrawal is nil then no need to pay tax

Many people facing cash crunch due to job loss or salary cuts are going for EPF withdrawal facility offered by the government. However, you need to be cautious with the process of withdrawal as it can have tax implication if you have not completed five years. We tell you how to use EPF withdrawal to your advantage:

What is COVID-19-related advance?

After the announcement of the lockdown, the government anticipating cashflow problems of salaried employee allowed them to get funds from their EPF balance. "The non-refundable withdrawal from the EPFO has been allowed to be 75 per cent of the credit standing in the EPF account or an amount equivalent of three months' wages, whichever is lower," says Sonam Chandwani, Managing Partner, K S Legal.

So far no deadline has been given by the government to end this facility. "The facility of withdrawal is available till the time the pandemic continues to exist in India. However, only one withdrawal is available in respect of COVID-19," says Archit Gupta, Founder and CEO - Cleartax.

75% withdrawal under COVID-19 is tax free

The added advantage of the COVID-related advance is that it comes with tax exemption. "The amount withdrawn as advance under the purpose 'Outbreak of pandemic (COVID-19)' is not taxable, as clarified by the EPFO in a list of FAQs dated April 4, 2020. Hence, the EPF advance is not the income of the member. Also, there is no TDS liability on the withdrawal," says Gupta.

Mind the tax implications before going for higher withdrawal

EPF rules allow members to apply for 100 per cent withdrawal after two months of continuous unemployment. So, instead of COVID-specific advance if you wish to go for higher withdrawal it will be considered as normal withdrawal. This withdrawal does not enjoy the blanket tax free status similar to COVID-related advance. "PF withdrawal by a member is tax-exempt only if such member rendered continuous service of five years or more. The period of service includes services rendered with more than one employer. However, the employee should transfer the EPF balance from former employer to the new employer," says Gupta of Cleartax.

If you have not completed five years of continuous service and yet has gone for higher withdrawal, it will be considered as income and TDS will be deducted on this withdrawal by the EPFO. "TDS is deducted at a rate of 10 per cent on EPF balance if withdrawn before five years of service," says Chandwani of K S Legal. You will also have to show this as income when you file your income tax return. However, in the given year if your taxable income including this income is less than Rs 5 lakh, you will not have an income tax liability. You can fill form 15-G to claim that your income tax liability would be nil and hence no TDS should be deducted.

Waiting for five-year to get over without contribution does not help

If one is closer to five years, some people think that by waiting for few more months they can meet the five-year service criteria. However, they are wrong. "In case you have discontinued employment before completion of five years of continuous service, and subsequently, withdraw after five years of opening the EPF account, the withdrawal will still be fully taxable. The period of five years is with respect to the continuous service and should be fulfilled to avail tax-exemption upon withdrawal," says Gupta of Cleartax. It means unless there is a monthly contribution for five years consistently, you will not get tax exemption on EPF withdrawal.

Defer withdrawal till you complete 5 years

If you have not completed five years of contributions, you better stick to COVID-specific advance. "One can defer withdrawal from the funds of the EPF account for five years of continuous service as thereafter there is no tax deduction. Consequently, in case of a job switch, the employment period under the new employer is also included to calculate the continuous stretch of time," says Chandwani of K S Legal. Once you join a new organisation you should make sure that you complete five years before going for a complete withdrawal.