How is EPF interest and withdrawal taxed?

Income Tax Tax Savings & Deductions
21

Hello All,
I am reaching out to seek some advice and insights regarding the Employees’ Provident Fund (EPF) for Non-Resident Indians (NRIs).

As an NRI, I am currently deliberating whether it is more advantageous to withdraw my EPF or to let it continue accruing interest. I have contributed to the fund during my employment in India, and I’m looking for guidance on the pros and cons of either option.

Here are some specific questions I have in mind:

  1. Withdrawal Implications: What are the tax implications of withdrawing EPF as an NRI? Are there any specific rules or exemptions that apply?

  2. Interest Accrual: If I choose not to withdraw, how does the interest accrual work for NRIs? Are there any limitations or benefits compared to keeping the EPF active?

  3. Investment Alternatives: Are there alternative investment options that might provide better returns compared to the EPF, considering the NRI status?

  4. Legal Requirements: Are there any legal requirements or restrictions for NRIs regarding EPF withdrawal or continuation?

  5. Personal Experiences: If any fellow NRIs have faced a similar decision or have valuable experiences to share, I would greatly appreciate hearing your insights.

I understand that everyone’s situation may be unique, but any advice or information that can help me make an informed decision would be highly beneficial. Thank you in advance for your time and assistance.

Looking forward to a fruitful discussion.

Best regards,
Vikas

22

Hey @VIkasDsalve,

In terms of taxation, the rules for EPF withdrawal remain the same for NRIs as in case of resident individuals.

Moreover, with regards to interest accrual, if no contribution is made in the PF account of a member for three consecutive years, then the account shall not earn interest after three years of stopping the contribution.

Hope this clarifies.

23

Thanks for comprehensive note @Surbhi_Pal

Request you to confirm the section of ITR2 where, interest income from PF account (while out of job) has to be reported. Please note, resigned from work in the mid of Financial year and have not joined back anywhere so far.

24

Hey @Ajay12,

If the withdrawal amount is exempted from taxes, the same needs to be reported as ‘income from other sources’ under the schedule ‘exempt income (EI)’.

Hope this helps!

25

Thanks @Surbhi_Pal. PF not withdrawn, query was regarding Interest for the period between date of leaving job:31.08.23 till FY end:31.03.24.

PF Interest not exempted, as its generated during non contribution period. Kindly suggest appropriate schedule/ section of ITR-2.

26

Hey @Ajay12,

Apologies for the oversight. The interest amount would be reported under Schedule OS (other source income).

27

I’ve two queries regarding Employer’s contribution to the EPF.

  1. Is Employer’s contribution tax exempt in new regime as well?
  2. If basic salary is more than 15000, how much of the employer’s contribution will go towards and EPF and how much in EPS?
28

In the new tax regime, the employer’s contribution to the EPF remains tax-exempt.
If the basic salary exceeds Rs. 15,000, the entire employer’s contribution will be allocated towards the Employee Provident Fund (EPF) and none towards the Employee Pension Scheme (EPS).

29

Hi Sonia,
Thanks for your reply.

Let’s say my basic salary is 50000 which makes employee and employer’s contribution both 6000.
Do you mean to say that the entire 12000 will go to EPF or 1250 from employer’s contribution (8.33% of 15000) will go to EPS and the rest will go to EPF.

30

Hey @curious,
The employee’s contribution goes entirely to EPF and 8.33% of the employer’s contribution goes towards EPS. Now, in your case if the employer is contributing 12% of the basic salary (₹50,000) towards EPF, 8.33%of ₹50,000 (₹4,165) would be contributed towards EPS.

31

Hi @Surbhi_Pal,
Thanks for the reply.

Is this the default behaviour?
I thought, even though it’s possible to have 8.33% of entire employer’s contribution to go to the EPS, it’s done only if you specifically request for the higher pension. Otherwise, only 1250 will go to the EPS and the rest of the employer’s contribution will be added to the EPF.

32

EPF (Employee Provident Fund) interest and withdrawal are taxed as follows:

  1. Interest earned on EPF contributions is tax-free.
  2. Withdrawals made before completing 5 years of continuous service are subject to taxation.
  3. Withdrawals after 5 years are tax-free.
  4. If withdrawn before 5 years due to unemployment, the withdrawn amount is taxable.
  5. TDS (Tax Deducted at Source) is applicable if the withdrawal amount exceeds the specified limit.
  6. EPF withdrawals for specific purposes like medical emergencies are tax-free.
33

Have a query on continuous service. I have total 10 yrs of fund in same UAN, where first 5 yrs are continuous , but later there are multiple gaps in next 5 yrs… Now I want to withdraw 50% of funds as I have lost job in oct 2023 (and may get the job in this financial year). Any suggestions how would be the continuous service scenario gets into for tax calculated withdraw amount.

Thanks in advance for taking query.

34

Hey @MobiApp_Dev,

As the amount is withdrawn after 5 years of continuous service, the same would be tax-exempt in your hands.

Here’s a detailed read for you!

35

My employer has been showing 12% of employers contribution to PF under section 10 exemption. I can clearly see that on my form 16 too. Is this the right thing to do? From my experience employer or employe contribution to PF both comes under section 80C. Is my employer doing anything wrong here?

36

image
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Here is a snap of my form 16

37

Hey @Shivam_Chawla,

Employer’s contribution towards PF up to 12% of your basic salary is exempted from taxes. Moreover, the employee’s contribution is allowed as a deduction u/s 80C.

Hope this clarifies your query.

38

Hey @Surbhi_Pal thankyou for the response. Are you also saying that nothing is wrong on my form 16? And that the exemption should be a part of section 10? Do you have a reference i can go through for more clarity?
I am confused cuz my CA says it shouldn’t be under section 10.

Please advise.

39

Hey @Shivam_Chawla,

In section 17 of the Income Tax Act, it is mentioned that an employer’s contribution towards PF will not be considered a part of taxable salary.

Here’s the link to the relevant section.

Moreover, here’s a snippet for your easy reference.

image
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Hope this helps!

40

Have a query on continuous service. I have total 10 yrs of fund in same UAN, where first 5 yrs are continuous , but later there are multiple gaps in next 5 yrs… Now I want to withdraw 50% of funds as I have lost job in oct 2023 (and may get the job in this financial year). Any suggestions how would be the continuous service scenario gets into for tax calculated withdraw amount.