Financial advisors strongly recommend that employees refrain from withdrawing their Provident Fund (PF) amount before retirement to avoid financial difficulties later. The government has implemented regulations aligning with this advice, ensuring that the PF funds can only be accessed after retirement, safeguarding individuals from post-employment financial challenges. However, there are certain circumstances in which early withdrawal is permitted, with associated tax implications. Let’s delve into the details of these regulations.
As per the Employees’ Provident Funds and Miscellaneous Provisions Act of 1952, 12% of an employee’s basic salary is contributed to the PF. According to the rules outlined by the Employees’ Provident Fund Organisation (EPFO), if an individual has been employed continuously with the same employer for a minimum of 4.5 years, they can transfer the entire amount from their current PF account to a new account opened with a different employer. If an employee withdraws funds from their previous account after initiating a new PF account, the withdrawn amount becomes subject to taxation as per the Income Tax Act. However, no tax needs to be paid on the transferred amount.
Merging PF accounts is a necessary step when transitioning between jobs. Upon commencing new employment, individuals receive a Universal Account Number (UAN) from the EPFO. Under this UAN, the employer opens a PF account, where both the employee and the company contribute monthly. When switching jobs, the employee provides their new employer with the UAN, who then opens another PF account under the same UAN. It is crucial to merge the previous PF account with the newly opened account at a later stage.
Tax liability arises based on the duration of PF account holding. If an individual withdraws funds from their PF account after 5 years, the withdrawal becomes entirely tax-free. However, if the withdrawal is made before completing 5 years, it becomes taxable. In the case of early withdrawal within the initial 5-year period, a tax deduction of 20% is applied if the subscriber’s PAN card is not linked to the account. Conversely, if the PF account is linked to PAN, a Tax Deducted at Source (TDS) of 10% is levied.
Exceptions to tax payment are granted in specific circumstances. Employees are not required to pay tax if they had to leave their job due to poor health, business closure by the employer, or any other reasons beyond their control. In such cases, no tax is applicable when withdrawing funds from the PF account. Similarly, when an employee changes jobs and transfers their PF funds from the old account to the new account opened with the new employer, no tax obligations arise.