How EPF withdrawals are taxed
Withdrawal of EPF accumulated harmony is not taxable if:
An employee collaborating in EPF has rendered ongoing provider for 5 or far more a long time
Or, if in advance of 5 yrs, the employee’s services has been discontinued on grounds of sick-health and fitness, or by contraction or discontinuance of employer’s business enterprise or other will cause outside of the management of the staff.
In other conditions, the accrued harmony withdrawn inside five yrs of ongoing support is thought of as taxable cash flow.
In the course of the Covid-19 pandemic, lots of workforce misplaced their employment owing to enterprise uncertainties. The pursuing illustration provides out the taxability of EPF withdrawal in unique circumstances/ situations (all figures in Rs): As Rohan’s employment was terminated by his employer, the EPF harmony withdrawn by him will be exempted from tax.
As Rashi voluntarily resigned from employment soon after doing the job for 2 decades, her EPF equilibrium withdrawn would be taxable. For withdrawals in extra of Rs 50,000, tax is usually deducted at source. Roshni, who did not withdraw the EPF amount, can map the accrued balance to the new employer, in situation she carries on with EPF. Rahul rendered constant support of extra than five years, so his accrued EPF would not be taxable. Having said that, the fascination that has accrued for the time period of two several years following cessation of employment would be taxable in his fingers.
EPF advance for the duration of pandemic
The authorities has authorized users of the EPF plan to assert ‘nonrefundable advance’ from their EPF account to the extent of the essential wages and dearness allowance for a few months, or up to 75% of the total excellent in the EPF account, whichever is a lot less. This has been a really powerful plan and a timely intervention to deal with liquidity challenges confronted by staff in the course of the pandemic. The FAQs unveiled by provident fund authorities have clarified that this sort of withdrawals will not be taxable. Nonetheless, the corresponding modification in the Money Tax Act to assure that the non-refundable progress received is not taxable is still awaited.
Exemption appealing for social protection withdrawals
As compared to developed nations around the world, India does not have a strong social stability net to defend staff in the function of unemployment. Globally, many international locations give unemployment insurance policy to staff members upon satisfaction of specified conditions. For occasion, in the US, all those who are unemployed due to no fault of their own are suitable to assert unemployment insurance. In Canada, employment insurance policy delivers positive aspects to men and women who have misplaced their work and are readily available for operate but are unable to locate a task. No this kind of social safety support is available in India. And, taxation of EPF withdrawals would go away a reduce sum in the hands of workforce in situations of require.
For taxing EPF withdrawals, the restrict of 5 many years may be retained. Nonetheless, exemption from tax may be viewed as if withdrawals are designed right before 5 many years to fulfill specified contingencies/everyday living targets this sort of as acquire of residential property, relationship, training of children, medical costs/ unexpected emergency, pandemics these types of as Covid-19 and many others.
The government is in the course of action of implementing the new Labour Codes, probably to be efficient from April 1, 2021. A single of the essential areas of the code is to present ‘social safety for all’. In maintaining with this spirit, there is a need to have to amend the tax legal guidelines also, to no longer matter EPF withdrawals to tax.
– By Rama Karmakar
The author is Tax Companion at EY India. Ankur Agrawal, senior tax skilled with EY, also contributed to this article (Sights expressed are personalized)