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EPF Withdrawal – Taxable or Exempt?

A contribution towards an EPF account provides a benefit to individuals by way of a deduction under Section 80 C (see here). It would also be good to know what would be the income tax implications of EPF withdrawal. Interestingly, EPF withdrawal is taxable under certain circumstances and exempt under the certain circumstances.

The following table will help you easily understand the taxability on withdrawal of EPF:

Sl NoScenarioTaxability
1Amount withdrawn is < Rs 50,000 before completion of 5 continuous years of serviceNo TDS. However, If the individual falls under the taxable bracket, he has to offer such EPF withdrawal in his return of income
2Amount withdrawn is > Rs 50,000 before completion of 5 years of continuous serviceTDS @ 10% if PAN is furnished; No TDS in case Form 15G/15H is furnished
3Withdrawal of EPF after 5 years of continuous serviceNo TDS. Further, the individual need not offer the same in the return of income as such withdrawal is exempt from tax
4Transfer of PF from one account to another upon a change of jobNo TDS. Further, the individual need not offer the same in return of income as it is not taxable.
5Before completion of 5 continuous years of service\ if employment is terminated

due to the employee’s ill health. The business of the employer is discontinued or the reasons for withdrawal are beyond the employee’s control

No TDS. Further, the individual need not offer the same in the return of income as such withdrawal is exempt from tax
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How to calculate Pension under EPS

We have discussed everything about EPS in our series of Articles on EPS.

You can read them

http://www.wealthcafe.in/basics-of-employee-pension-scheme-eps/

http://www.wealthcafe.in/forms-of-eps/

http://www.wealthcafe.in/is-the-monthly-pension-paid-under-eps-just/

Monthly pension calculation (Employed after 16/11/1995)

The pension amount for those employed after 16th November 1995 is calculated as follows:

Pension amount = (Pensionable salary * Service period)/70

In order to calculate the monthly pension, in this case, the following points need to be kept in mind:

  • Pensionable salary is the average income of the preceding 60 months. Most employers have a restriction on pension contribution to either Rs.1,250 or 8.33%, whichever is minimum. In these scenarios, the maximum pensionable salary would be Rs.15,000.
  • Only the basic pay and dearness allowance are considered a salary.
  • If an employee has completed over 20 years of service, then two years should be added as a bonus in the equation. According to the rules, the bonus can be also applied for the service before 16/11/1995.
  • The new rules make it mandatory for the pension to be more than Rs.1,000 per month.
  • An employee is eligible for a pension after completion of 10 years of service.

2.      Monthly Pension Calculation for a member who joined EPF before 15.11.1995 have 3 components in the Pension calculation

a) Procedure for calculating the Past Service Pension

  • The pension is calculated twice based on the period of employment.
  • Once before 16/11/1995 and once after 16/11/1995.
  • For calculation of pension before 16/11/1995, the following table can be used. In this table, the pension is fixed based on the pay and period of service.
Years of past serviceUp to Rs.2,500 (Salary)Above Rs.2,500 (Salary)
Below 11 years8085
Between 11 to 15 years95105
Between 15 to 20 years120135
More than 20 years150170
  • Find out the period that had elapsed between 16.11.1995 and the date of exit and based on this period locates the corresponding Table ‘B’ Factor. Date of Exit is Date of attaining 58 years for superannuation/early pension, Date of Death for widow pension and Date of Disablement for Disablement Pension.
  • Multiply the Past Service Benefit and the Table B factor, which gives the Past.

b) Procedure for calculation of Pensionable Service Pension

  • Find out the Category of the member as to whether he belongs to X, Y or Z Category.
  • X – Date of commencement of pension is between 16.11.1995 and 15.11.2000 Y – Date of commencement of pension is between 16.11.2000 and 15.11.2005 Z – Date of commencement of pension on or after 16.11.2005.
  • Find out the Pensionable Service and Pensionable Salary of the member and substitute the same in the formula given as below.

(Average Salary X Service)/70

  • If the formula pension calculated is less than 335/438/635 respectively, for X, Y, Z categories, then only that minimum pension is to be given.

c) Procedure for the calculation of Total Pension-Add the Past Service Pension and the Formula Pension.

  • Add the Past Service Pension and the Formula Pension.
  • If the total pension is less than 500/600/800 respectively, for X, Y, Z categories, then that minimum pension shall be the total pension.
  • But this total pension is for an eligible service of 24 years or more, and if the eligible service is less than 24 years, then this total pension has to be proportionately reduced subject to a minimum of 265/325/450 depending on X, Y, Z categories (only when the minimum pension is given).
  • If the total pension itself is more than the minimum, then the proportionate reduction need not be made even if the eligible service is less than 24 years.

Wealth Cafe Tip – We tend to accept EPF the way it is displayed in our passbooks. There is always a scope of error and one should verify every return and investment they are making.

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Lesser known facts about Employee Provident Fund (EPF)

We have discussed the basic of EPF.

Listed below are the specific rules regarding EPF for your reference.

You can increase the contribution to EPF

You can contribute more than 12% mandatory contribution to your EPF account. You can contribute up to 100% of your basic pay if you want but the employer is under no obligation to match your EPF contribution. You will get the benefit of your personal contribution (in excess of the basic limit) in section 80C of the Act. All other rules of EPF will apply to the additional contribution.

EPF withdrawal is taxable

The investment in the provident fund is tax-free. According to the rules of EPF, the maturity proceeds and interest on it are tax-free. We take the tax benefit of EPF contribution. We never think of the tax on EPF Withdrawal amount.

If you try to withdraw the EPF balance before 5 years, you must pay back the tax benefit, you had availed at the time of investment. EPF  will deduct the TDS on the withdrawn amount before depositing the same in your bank account (where money is withdrawn before 5 years).

An employer cannot withhold your EPF balance

After resignation, many employees leave the company without serving the notice period and sometimes on a bad note with their employer. In such a situation, the EPF balance is the only handle to arm-twist the employee. Some employer’s never forward the PF withdrawal form to the regional PF office.

The Employer has no right to do so. The Rules of EPF say that an employer can never withhold the EPF balance. The money never remains with them. The employers are the mere facilitator of the EPF scheme. The erring employer can be also punished for this behaviour.

You can withdraw your EPF balance without the signature of the employee. You can do the same by taking signatures and other formalities from the banker.

You cannot withdraw 100% of your EPF corpus

You can withdraw the EPF corpus if you have been unemployed for 2 months. But this withdrawal would not be for the full amount. The is a new rule of EPF withdrawal. Now, you can withdraw only your contribution to the EPF and interest on it. The employer’s contribution and interest will remain in the PF account till the retirement age  (58 years).

You can opt out of EPF

We generally think EPF is a mandatory contribution. However, this is not the case. EPFO guidelines say that if an employee’s salary is more than INR 15,000 per month he/she can avail the option of not being a part of the EPF scheme. If this scheme has opted, the entire salary is paid out to the employee, without any deduction, towards EPF every month.

Having said that, it is important to note here that an employee has to opt out of Provident Fund at the start of his job and if he/she is part of EPF programme even once in his life, this option of opting out stands null and void.

EPF provides life insurance as well

A lot of people are not aware of this benefit. Let us explain how this works. If a company does not provide insurance coverage to its employees under the group life insurance plan, then the companies are required to contribute 0.5% of monthly basic pay towards Employees’ Deposit Linked Insurance (EDLI) scheme. This contribution is capped at INR 15000. Companies that are already covering employees for insurance are exempted from this plan of EPFO.

Check your personal details with EPFO

Many times people realize at the time of withdrawal or transfer of EPF that incorrect personal details are submitted with EPF. In such cases, you must check and rectify the same while creating an account with the UAN. You must inform your employer to get the same updated.

We will be posting a detailed article on how to change the same through UAN.

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How to check EPF balance?

There was a time when checking your EPF balance or withdrawing the same was a very tedious task. People had to write endless emails, follow up with their employers, Employee Provident Fund Organsation (EPFO) etc. to obtain the information. The process is now available online and you can check your EPF balance through the following means: EPF passbook with UAN: The UAN is a 12-digit number allotted to each Employee Provident Fund member by the EPFO which gives him control of his EPF account and minimizes the role of the employer. UAN number activation started in Oct 2014. You can download the EPF passbook if you have activated your UAN number. Refer our Article on UAN for a step by step process to view the same. EPF UAN passbook is available at http://www.epfindia.gov.in  >> Our Services >> For Employees >> Member Passbook or e-Passbook on right hand side of the home page of EPF. e-Passbook contains transaction details of an individual’s account You can also download the e-passbook in .pdf format. This facility is to view the Member Passbook for the members registered on the Unified Member Portal. Passbook will be available after 6 Hours of registration at Unified Member Portal. Changes in the password at Unified Member Portal will be effective at this Portal after 6 Hours. Passbook will have the entries which have been reconciled at the EPFO field offices. Passbook facility is not available for the Exempted Establishments Members / Settled Members / In-Operative Members. Check EPF balance with Umang App Download Mobile App ‘Umang’ from Google Play store. You can also view your monthly credits through the passbook as well view your details available with EPFO. Unified Mobile Application is an evolving platform designed for citizens of India to offer them access to the pan India e-Government services from the Central, State, Local Bodies, and Agencies of government on app, web, SMS, and IVR channelsIt will integrate almost 200 government services by 2019 across departments, allowing people to work seamlessly with the government. It is available as a website https://web.umang.gov.in/ and as a mobile App on Android, Windows and iOS platform. Download the Umang app from your respective app store such as Google Play Store for Android users. Once you have the app follow the below steps to view your EPFO transactions:
  • Select EPFO
  • You will find three types of services namely – Employee Centric, General services & Employer centric services.
  • Select Employee Centric Services.  You will see View passbook, Raise claim & Track Claim
  • By Clicking View Passbookyou can see the passbook.
EPF Balance by Missed Call  If you have a valid UAN, your mobile number too will be registered with the EPF department. A missed call to 011 229 01 406, at no cost, will ensure that you receive an SMS that lists down your PF number, age and name as per the EPF record. This facility is available only to UAN members. You must register yourself on UAN to avail this service. EPF balance by SMS: If your UAN is registered with EPFO, you can get details of your latest contribution and the PF balance by sending an SMS to 7738299899. You need to send this message: EPFOHO UAN ENG. ENG is the first three characters of the preferred language. So, if you want to receive the message in Marathi, then type in EPFOHO UAN MAR. The facility is available in English, Hindi, Punjabi, Gujarati, Marathi, Kannada, Telugu, Tamil, Malayalam, and Bengali. It has become very easy to check balance of your EPF account. Checking it regularly and reviewing it upto you as an investor.    
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New EPF Rules – 2018

he EPF account consists of contributions from the employer and employee. However, the money in an EPF account cannot be withdrawn at whim.

Here are 10 important rules about EPF withdrawal:

  1. Money from the EPF account cannot be withdrawn during employment, unlike a bank account. EPF is a long-term retirement savings scheme. The money can be withdrawn only after retirement.
  2. Partial withdrawal from EPF accounts is permitted in the case of an emergency such as medical emergency, house purchase or construction, and higher education. Partial withdrawal is subject to limits depending on the reason. The account holder can request online for partial withdrawal.
  3. Although the EPF corpus can be withdrawn only after retirement, early retirement is not considered until the person reaches 55 years of age. EPFO allows withdrawal of 90% of the EPF corpus 1 year before retirement, provided the person is not less than 54 years old.
  4. The EPF corpus can be withdrawn if a person faces unemployment before retirement due to lock-down or retrenchment.
  5. The EPF subscriber has to declare unemployment in order to withdraw the EPF amount.
  6. As per the new rule, EPFO allows withdrawal of 75% of the EPF corpus after 1 month of unemployment. The remaining 25% can be transferred to a new EPF account after gaining new employment.
  7. As per the old rule, 100% EPF withdrawal is allowed after 2 months of unemployment.
  8. EPF corpus withdrawal is exempted from tax but under certain conditions. Tax exemption on EPF corpus is permitted only if an employee contributes to the EPF account for 5 continuous years. The EPF amount is taxable if there is a break in the contribution to the account for 5 continuous years. In that case, the entire EPF amount will be considered as taxable income for that financial year.
  9. Tax is deducted at source on premature withdrawal of the EPF corpus. However, if the entire amount is less than Rs.50,000, then TDS is not applicable. Keep in mind, if an employee provides PAN with the application, the applicable TDS rate is 10%. Otherwise, it is 30% plus tax. Form 15H/15G is a declaration form, which states that a person’s total income is not taxable and thus, TDS is avoidable.
  10. An employee does not have to await approval from the employer for EPF withdrawal anymore. It can be done directly from the EPFO, provided the employee’s UAN and Aadhaar are linked, and the employer has approved it. EPF withdrawal status can be checked online.

Is the monthly pension paid under EPS just?

The government has fixed the monthly pension benefit at 1,000 INR from the financial year 2014-15. Those who started job after 1 Sep 2014 and earning more than 15,000  INR in basic and DA will not be contributing to the Pension Scheme. Before Sep 1, 2014, it was Based on a maximum employment period of 35 years, and a maximum contribution of Rs 6500, the maximum amount of pension as per the Pension formula would be = 6500 * 35)/70 = Rs 3,250 per month or  Rs. 39,000(3250 * 12) per year. Our article How to calculate your pension under EPS will explain the same in detail

  • Maximum Pension one can get is 7,500 INR per month.
  • Minimum Pension one can get is 1,000 INR per month.

Is the Monthly Pension paid under EPS just?

The amount of pension is meager. If one would have invested 541 INR in a Debt Mutual Fund at the rate of 8% for 35 years one would get 12,49,263 as maturity amount. If this maturity amount is put in buying the Pension plan and put the above amount 12,49,263 INR in the premium calculator of LIC with an option as Annuity payable for life, one would get a monthly pension of 10,150 INR which is much more than 3250 INR.

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Understand your salary structure

 “The number of INR 50,000 per month that the company has offered to pay you is it the in-hand number or your CTC?” I could not help but ask my friend, Leesha this question (and ruin her excitement) when all she wanted me was to be happy for her new job at a leading fashion house in Mumbai. She obviously did not understand the term CTC.  She told me that she was offered INR 50,000 per month and reckoned it was sufficient to live a decent life in Mumbai. What she didn’t understand was that the amount of INR 50,000 was the CTC amount and the actual amount she would receive in hand each month would be lower. I asked her ‘Have you heard about the IIT students getting a package of INR 24,00,000 and more?’ After she answered in affirmative, I further questioned her ‘How much do you think, that person would be getting each month in his/her bank account?’ My friend answered with a bit of jealousy that the amount would be INR 200,000. I told her that it is not so, the student would get anything between INR 100,000 to INR 135,000 as his/her in-hand salary. The amount of INR 24,00,000 is their CTC and various components get deducted before receiving the final salary. I explained to her that the industry generally discusses salary in terms of CTC and not in-hand (which are not the same thing). By looking at her face, I realized either she has assumed the worst or is absolutely clueless about anything that I just said. Then I started to explain to her exactly in detail what I meant. In-hand salary (also known as take-home salary) is the amount that you actually receive in your bank account at the end of each month whereas CTC (also known as Cost to company) is the total salary amount before any taxes, insurance amount, bonus and other various deductions. This amount is generally printed on the offer letter issued to an employee. Salary is always offered on per annum basis. It is generally never negotiated or discussed on a per month basis. My friend would be expecting an amount of INR 600,000 (50,000*12) annually in-hand but the amount is actually INR 600,000 CTC.  In short, in-hand salary = CTC minus Deductions CTC is always a higher number than the in-hand salary number. The general deductions which are subtracted from the CTC amount to arrive at the final ‘ in-hand’ or ‘take-home’ salary of an individual can include:
  1. Telephone, car, and other allowance Many employers reimburse their employees’  telephone & internet bills,  children’s education and uniform allowance up to a specific limit. This amount is also included in the CTC as a part of your salary. However, this payment is not made at the end of each month but is made only when the bills (up to the limits specified in the offer letter) are submitted to the company. Thus, one can collect bills over 6 months and claim their reimbursements once in 6 months or not claim anything until the end of the year. Where an employee does not submit any bills throughout the year, the employer shall pay the amount due to an employee after deducting relevant taxes on the same at the end of the year. Where bills are submitted to the extent of the limits specified, no taxes are deducted by the employer while making these payments.
  2. Leave Travel Allowance (LTA) – LTA is similar to the allowances mentioned above. The same is paid to you only after you submit the relevant bills and documents to your employer. There is a detailed article, written on How to save tax through LTA
Components of a salary structure
  1. Gratuity –  Gratuity is payable to an employee on the termination of his /her employment after they have rendered continuous service for not less than 5 years. It is important to know that gratuity is payable only on resignation (after 5 years of service), retirement or death. Thus, even where the same is included in your CTC, it is not paid to you until you serve 5 years. If you leave the company before completion of 5 years of service, this amount is not paid to you even though it formed a part of your CTC.
  2. NPS (Employer Contribution) – An employer may contribute a % of your basic salary towards NPS – National Pension Scheme. Any money from NPS is received only post-retirement. There are certain conditions for withdrawing money before retirement. We have discussed in detail about NPS in our articles What is NPS and How can you withdraw money from NPS. The NPS amount is a part of your CTC but not paid each month to you and instead deposited with PFRDA each month to be paid to you on your retirement.
  3. Employees’ Provident fund (EPF)– An employer contributes 12% of the basic salary payable to the employee towards EPF. Where an employee opts for EPF, the employee contributes 12% of his basic salary in addition to the Employers Contribution. A total of 24% of your Basic salary is deducted from your CTC resulting in a lowered in-hand amount. There are many things to know about EPF apart from the impact on the in-hand amount. We have discussed the same in detail in our series of Article under EPF
  4. Taxes All employers are required to deduct taxes on the salary that they pay to the employees. If you are under the belief that you are hardly earning anything and should not be paying any taxes, you are mistaken. If an employee is earning more than INR 2.5 lakhs per annum (this amount is the CTC amount), the employer shall deduct appropriate taxes on the same. Apart from EPF, the major impact on the in-hand salary is the taxes which are deducted by the employer. Refer to our Articles Ways to reduce taxes without any investments and Investments which help you reduce taxes.
  5. Health Insurance or medical-claim Many employers provide their employees with health insurance cover and the premium amount of the same is included in the salary CTC amount. However, that amount is not received in-hand each month by the employee but is directly paid by the employer to the respective health insurance providers.
  6. BonusThe Bonus component in one’s Salary is completely dependent on the performance and targets achieved. The maximum bonus that an employee is eligible to receive is included in the CTC. However, it is received only once a year and depends on your performance which is assessed by your employer. Where your offer letter states a bonus of INE 300,000 you may receive anything less than INR 300,000 based on the targets achieved by you and after deducting the applicable taxes on the bonus.
  7. House Rent Allowance (HRA)- The amount paid as rent when the employee is settled in a new city. This is received in hand each month until you are living in accommodation provided by the employer.
In conclusion, the deductions from the CTC can broadly consist of five parts:
  • Contributions: Amount that is contributed by the employer on behalf of the employee towards EPF, Insurance, a gratuity fund or a pension fund. It is a part of your salary but is received by you only after you have completed a few years of service and on the fulfillment of certain conditions.
  • Taxes: Income-tax – the same is deducted when your income is more than INR 250,000 subject to some investments and profession tax  – this is deducted for all professional employees.
  • Employer Expenses: House Rent and Health Insurance – Expenses incurred by the employer for your benefits but not paid in-hand to you.
  • Reimbursements and allowances: Amount that you receive as reimbursements/allowances (without taxes) after the relevant expenses proofs are submitted. Where you do not submit the proofs, the same is paid to you at the end of the year after deducting taxes from the same.
  • Variable salary: Amount that you receive as performances based incentives, profit-based bonus or sales based targets (Bonus).
By the end of this discussion, Leesha was not very happy as now she realised that she will receive only INR 40,800 in-hand each month and not the INR 50,000 CTC she was offered by her employer. For a fresher, this can be an anxious phase as you do not want to be considered unaware by your new employer and yet know how much exactly you are going to earn. We, through are articles are educating you about your income as understanding and knowing your income is the first step towards financial wellbeing.
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When can you withdraw your EPF?

Under what situations can you withdraw the EPF

One may choose to withdraw EPF completely or partially. EPF can be completely withdrawn under any of the following circumstances:
a. When an individual retires from employment
b. When an individual remains unemployed for a period of 2 months or more. Here, it needs a mention that the fact that the individual is unemployed for more than 2 months has to be certified by a gazetted officer. Further, complete withdrawal of EPF while switching over from one job to another without remaining unemployed for 2 months or more(i.e. During the interim period between changing jobs), will be against the PF rules and regulations and therefore illegal. Partial withdrawal of EPF can be done under certain circumstances and subject to certain prescribed conditions which have been discussed in brief below:

Sl NoParticulars of the reason for withdrawalLimit for withdrawalNo of years of service criteriaOther conditions
1MarriageUp to 50% of employee’s share of contribution to EPF7 yearsFor the marriage of self, son/daughter, brother/sister
2EducationUp to 50% of employee’s share of contribution to EPF7 yearsFor the education of either himself or his children after class 10
3Purchase of land/purchase or construction of a houseFor land – up to 24 times of monthly wages plus Dearness allowance

For house – up to 36 times of monthly wages plus Dearness allowance

5 yearsThe asset i.e. land or the house should be in the name of the employee or spouse or Jointly.
4Home loan repaymentUp to a maximum of 90 %, from both employee’s contribution and employer contribution in Employee Provident Fund.10 yearsi. The property should be registered in the name of the employee or spouse or jointly

ii. Withdrawal permitted subject to furnishing of requisite documents as called for by the EPFO relating to the housing loan availed,

iii. The accumulation in the member’s PF account (or together with the spouse), including the interest, has to be more than Rs 20,000.

5Renovation of houseUp to 12 times of the monthly wages5 yearsThe property should be registered in the name of the employee or spouse or jointly.
6A little before retirementUp to 90% of accumulated balance with interestOnce he reaches 57 years ( as per recent amendment)For himself
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UAN – Universal Account Number – Things to note

What is UAN?

The UAN or the Universal Account number is a 12 digit unique number allotted to each member of the Employee Provident Fund (EPF) which helps them to manage their EPF account.

The UAN will be associated with an employee and will connect all his PF (Provident Fund) accounts across organizations.

This number is issued by the Ministry of Labor and Employment, Government of India.

If an individual changes his job, he will get a new PF account with the organization. This way, multiple PF account numbers will be allotted to an employee. Multiple PF account numbers is an area of concern as many employees report grievances related to transfer and withdrawal of PF amount. To counter this problem and to make the management of provident fund accounts easier, the concept of UAN was introduced The UAN is a single account number that will connect the multiple IDs associated with an employer. With UAN, an employee can connect all his EPFO accounts to make the process of PF withdrawal and transfer easier.

Advantages of UAN

Once you have the UAN number and you register it then you can check many details. Benefit Of Registration of UAN  at UAN Member e-Sewa Portal are as follows:

  • You can download the updated EPF passbook. The passbook will tell you the EPF balance broken into Employee Contribution(EE) and Employer Contribution (ER). Also deduction for Employee Pension Scheme (EPS). Sample passbook is shown below.
  • You can link your previous PF accounts (before Oct 2014) which are not linked to UAN number.
  • All you have to do to bring your PF accounts together is give your UAN to current employer. After KYC verification, you will be able to view and manage all accounts.
  • You will get notifications on your mobile every time your employer makes a monthly deposit in your PF account.
  • You will know about all the movements in your PF account and thus, your employer cannot dominate the same anymore.
  • You can verify your transfer claims on EPFO web portal by mentioning your UAN.
  • You can change the mobile number and email address.

Read about the step by step process of opening your UAN account in the next article.

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