When it comes to withdrawing your Employee Provident Fund (EPF) balance, the tax rules can get confusing — especially if the withdrawal is made before completing five years of service. Here’s what you need to know.
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I have withdrawn balance in my Employee Provident Fund account during the last year to start my own start-up. The amount of EPF balance withdrawn includes various components like Employer’s Contribution, Employee’s Contribution and interest on respective contributions. Tax has been deducted on the entire amount as is evident from Form No. 26AS. The same has been shown under the head salary. As I did not claim deduction under Section 80C for my contribution to EPF, my share of contribution received back does not become taxable. Please let me know how all the above components have to be disclosed in the ITR being filed now to avoid any complication in future.
Expert Advice: If an employee withdraws the balance in their EPF account before completing five years of continuous contributions (except under certain unavoidable circumstances), the amount withdrawn becomes taxable.
The employer’s contribution, along with the interest accrued on it, has to be reported under the head “Salaries.” The employee’s own contribution, if Section 80C benefit was not claimed earlier, does not become taxable again, but the interest earned on it will be taxable under the head “Income from other sources.” Since you did not claim Section 80C benefits earlier, you need not offer your own contribution for taxation. However, all accrued interest remains taxable.
Do note, under Section 192A, the provident fund office deducts tax at 10% if the withdrawal amount exceeds Rs. 50,000 and the five-year condition is not met. This is why the entire amount shows up in your Form 26AS under “salary.”
As there may be a mismatch between what you disclose and what is reflected in Form 26AS, you might receive a notice from the tax department. You need not worry — you can explain that you did not claim deductions on your own contributions in earlier years and support this with ITRs and documents.
Also, even if you are no longer salaried because you’ve started your own venture, you can still claim the standard deduction against the taxable portion of employer’s contribution and accrued interest. This is Rs 50,000 under the old tax regime and Rs 75,000 under the new regime.
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