Understand the nitty-gritties of making a PF withdrawal due to the COVID-inflicted cash crunch
If you are facing a financial crunch due to the Coronavirus Disease’s (COVID-19) economic impact, you can now dip into your employees’ provident fund (EPF) corpus to survive the crisis. After Finance Minister Nirmala Sitharaman’s announcement on March 26 permitting such withdrawals, the Employees’ Provident Fund Organisation (EPFO) has now operationalised the process for facilitating this withdrawal. It is termed ‘non-refundable advance’ in official parlance.
Read on to know more about the modalities of the withdrawal:
Who can make withdrawals citing COVID-19 hardships?
All employees who contribute to the EPF by way of mandatory deduction of 12 percent from their basic salaries every month can use this facility. According to the finance minister, this will benefit close to 4.8 crore employees registered with the EPFO.
What is the amount that can be withdrawn?
You can withdraw up to 75 per cent of your EPF account balance or three months’ basic wages or the amount that you actually need, whichever is lower.
Employers match employees’ PF contribution every month. Out of the employers’ contribution, 8.33 per cent is directed towards EPS (employees’ pension scheme). The EPF balance at any point in time is the sum of employers’ and employees’ EPF contributions plus the interest accrued over time. Put simply, your accumulated PF corpus.
For example, if your EPF balance on March 31, 2020 is Rs 10 lakh and your basic salary is Rs 50,000 per month, you will be able to withdraw only Rs 1.5 lakh. On the other hand, if your balance is Rs 2 lakh and basic monthly salary amounts to Rs 51,000, you can still withdraw only .
What constitutes basic wages?
Typically, your basic salary and dearness allowance, if any, will constitute basic wages. To figure out the actual amount, you need to check your salary slip. “The salary component on which 12 per cent has been deducted as your PF contribution will constitute basic wages,” explains Parizad Sirwalla, Partner and Head, Global Mobility Services, Tax, KPMG. Typically, this will be the amount tagged as ‘basic pay.’
In 2019, a Supreme Court ruling required employers to include certain allowances that have been paid regularly and uniformly for that employee category in the ambit of basic salary. “Our understanding is that 'basic wages' definition may tend to vary as per the employer. Also, the verdict is relevant largely for relatively low-earners whose basic salary is less than Rs 15,000,” says Archit Gupta, CEO and Founder, ClearTax. For those in the middle and higher-income groups, the basic salary as specified by their organisation will be taken into account.
Will I have to pay tax on the withdrawal?
Clarity is awaited on this matter, but the amount is unlikely to be taxed, as it will then defeat the purpose of allowing this leeway. “The Central Board of Direct Taxes (CBDT) will likely issue a notification stating that the amount withdrawn during this period will not be subject to tax. Ordinarily, except under a few circumstances, if you make a withdrawal before the period of continuous membership (employment) specified, the amount will be added to your income and taxed at your slab rate,” says Gupta. For example, if you want to withdraw funds to buy or construct a house, you can do so, subject to limits, only after five years of continuous EPF subscription.