Now, ITR forms seek EPF withdrawal details: All you need to know

Ensure that you fill out details correctly as the department will tally it with the TDS it has received from EPFO

Starting September, those who are filing income tax return will need to provide a detailed break-up of Employees’ Provident Fund (EPF) withdrawal. This is among the few changes that the Central Board of Direct Taxation has done in the tax filing utility and ITR forms recently.

It has been done to ensure that employees who withdraw EPF pay the requisite tax. “The income-tax (I-T) department is seeking these details to enable proper disclosure of income. If a person’s EPF withdrawal is taxable, it is taxable under various heads as there are various components to it – employee and employer contribution and also the interest,” says Neha Malhotra, executive director, Nangia Advisors.

According to rules, the withdrawal of EPF is taxable if an employee was in service for less than five years. The taxation depends on whether the individual had claimed tax deduction under Section 80C. If the employee had not taken the benefit, then only the employer’s portion will be taxed – as salary income  – and the interest earned will be taxed as income from other sources. If the individual had taken the income tax benefit, his contribution will be clubbed with his income and taxed based on the applicable slab. If an employee has completed five years of service, the withdrawals are tax-free.

To ensure compliance with tax laws , the IT department had earlier made tax deduction at source  (TDS) mandatory on withdrawal. If the EPF subscriber is liable to pay tax, the Employees' Provident Fund Organisation deducts the withholding tax before transferring the funds to the subscriber if the amount withdrawn is Rs 50,000 or more. The TDS is charged at 10 per cent if the subscriber furnishes the PAN. Otherwise, the tax is deducted at 34.6 per cent (maximum marginal rate or MMR applicable for that financial year).

EPF taxation is not just restricted to withdrawal. “If an individual is not employed but continues to earn interest, he will need to pay tax on the interest for the period he was not employed,” says Kuldip Kumar, partner and leader – personal tax – PwC India. This is irrespective of how long the individual was employed. According to rules, the interest earned in the EPF account is exempt from tax in the hands of ‘employees’. When a person is not working, he cannot be considered as an ‘employee’, and hence, the interest earned during the period is taxable.

Various Income-Tax Appellate Tribunals (ITAT) have also reiterated that interest earned when the individual is not in service should be taxed. Last year the Bengaluru bench of the ITAT, too, ordered the same in case of a retired person. If an employee retires after 55, the EPFO credits interest for three years after which the account is treated as inoperative. An employee of Bengaluru-headquartered let his EPF grow for a few years after retirement. On withdrawal, he didn’t offer the interest accrued post-retirement for tax. The assessing officer levied the tax on the interest earned after retirement. The ITAT agreed with the assessing officer.

There’s no clarity from the tax department on whether tax needs to be paid on accrual basis (annually) or at one go on withdrawal. Tax experts gave contrasting view regarding payment of tax in such a situation. Consult your chartered accountant and accordingly take a view on how you want to offer the interest to tax.