Thinking of withdrawing your PF? A surprise 30% tax may hit you

Taking out money defeats the purpose of long-term retirement savings, say experts

Are you tempted to withdraw your Provident Fund (PF) savings after quitting your job? Doing that without completing five years of continuous service could dent your savings, with up to 30 per cent of the amount going in taxes.

 

Legal experts and tax professionals say that hasty PF withdrawals defeat the purpose of long-term retirement savings and have hefty tax implications.

 

“Withdrawing your PF before five years of continuous service is treated as a taxable event,” said Vishal Gehrana, partner designate at Karanjawala & Co. and advocate-on-record at the Supreme Court. “Not only is the entire amount taxable as per your slab, but if you haven’t submitted your PAN, TDS (tax deducted at source) is deducted at 30 per cent.”

 

What exactly gets taxed?

 

Both employee and employer contributions, and the interest earned on them, become taxable income under Section 192A of the Income-tax Act, 1961. The Employees' Provident Fund Organisation (EPFO) deducts TDS if the withdrawal is more than Rs 50,000, said Gehrana.

 

Kunal Savani, partner at Cyril Amarchand Mangaldas, said: “The employer’s share along with interest becomes taxable as profits in lieu of salary. While the employee’s own contribution may be tax-free, interest on it could still be taxable, especially if thresholds are crossed.”

 

Even partial withdrawals made for housing, education or medical needs must comply with specific conditions of the EPF Scheme, 1952, to avoid tax trouble. 

 

Are there exceptions?

 

Yes. Tax is not applicable if the withdrawal is due to ill health, business closure, or reasons beyond the employee’s control. In such cases, the law provides relief.

 

Also, once an individual completes five years of continuous service or withdraws PF after retirement, the entire amount is tax-exempt under Section 10(12) of the Income-tax Act.

 

Mistakes to avoid

 

• Withdrawing PF instead of transferring it when switching jobs 
• Not maintaining five years of cumulative service 
• Failing to submit PAN, leading to higher TDS 
• Assuming Form 15G/H always prevents TDS (they work only if income is below the taxable limit)

 

Treat PF as long-term asset

 

“Instead of withdrawing PF early, transferring the account to the new employer preserves service continuity and tax benefits,” said Gehrana. He recommended maintaining documents to support your case in the event of a tax notice.

 

A recent X post by tax professional Sujit Bangar summed it up aptly: “Withdrawing PF after resigning job? If you’ve not completed 5 years, the entire amount is taxable. 30 per cent TDS. Don’t act in a hurry.” 

 

Supreme Court lawyer Tushar Kumar listed tips to access PF funds without triggering tax:

Transfer your PF account when changing jobs to maintain service continuity and qualifying for tax-free withdrawals after five years.

 

Avoid full withdrawals unless absolutely necessary. Instead, opt for partial advances allowed for medical, housing, or education needs, which are typically not taxable.

 

Time your withdrawal in a financial year when your total income is below the taxable limit to reduce or eliminate tax burden.

 

Submit Form 15G or 15H, if eligible, to avoid TDS on withdrawals below the tax threshold.

 

Keep documents ready, like employment history and reason for withdrawal, to support your case in case of scrutiny.