You may soon withdraw your EPF balance from ATMs, but tax rules could reduce your payout. Here's how

Under the current rules, EPF withdrawals are mostly tax-free if you have completed five years of continuous service

• EPFO 3.0 will allow PF withdrawals via ATMs for convenience
• Withdrawals before 5 years remain taxable as per current rules
• Taxation rules for EPF withdrawals are unchanged with EPFO 3.0

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EPFO 3.0, expected to roll out soon, is set to make provident fund withdrawals quicker and easier by allowing members to withdraw money through ATMs. The idea is to give subscribers more direct control over their funds by using their ATM card.

“The ATM card can be used like a bank debit card to withdraw cash from the EPF balance as and when required,” said Munab Ali Beik, Head – Compliance Advisory Practices at Core Integra.

According to experts, subscribers may be able to withdraw up to 75 percent of their total PF balance instantly through ATMs by simply stating the reason for withdrawal, such as medical emergencies, home construction, or periods of unemployment.

However, Kunal Kabra, Founder of Kustodian.Life said, "There is no confirmation from the EPFO on how this ATM withdrawal will work, what the limits would be, and under what sections you would be able to withdraw. Our assumption is that it will allow withdrawal upto 75 percent or a maximum 1-2 lakh for medical and other personal emergencies."

While this may sound like a big change, experts also say it is largely about convenience, not tax benefits. The way your EPF withdrawals are taxed will remain exactly the same, even if you are able to access the money instantly.

"There is also no clarification from EPFO on the taxation in part - currently there is no TDS or taxation on such withdrawals, so we expect it to remain the same," said Kabra.

Withdraw PF before five years and you may pay tax

Under the current rules, EPF withdrawals are mostly tax-free if you have completed five years of continuous service. This includes time spent with previous employers, as long as the EPF account has been transferred and not withdrawn.

However, things change if you withdraw money before completing five years. In such cases, the amount withdrawn becomes taxable and is added to your total income for the year.

“If you withdraw Rs 2 lakh before completing five years of continuous service, the amount may become taxable if no exceptions apply. This includes the employer’s contribution, interest, and any amount on which you claimed a tax deduction earlier under Section 80C of the Income Tax Act,” said Mihir Tanna, Associate Director of Direct Tax at SK Patodia & Associate LLP.

To understand this better, consider a simple example. Suppose you withdraw Rs 2 lakh from your EPF after working for only three years. Since you have not completed five years of continuous service, the withdrawal is not fully tax-free.

A part of this Rs 2 lakh includes your employer’s contribution and the interest earned on both employer and employee contributions. Also, if you had claimed tax benefits under Section 80C on your own contribution earlier, that benefit gets reversed. As a result, the entire Rs 2 lakh is added to your total income for that year and taxed as per your slab.

“There would be a TDS of 10 percent with PAN declaration if you withdraw an amount more than Rs 50,000 from your EPFO account before five years of continuous service. It will be added to your taxable income for the year. However, withdrawals after five years of service are completely tax-free,” said Amjad Khan, Chief Growth Officer – Healthcare, Benefits and Wellbeing at Prudent Insurance Brokers Pvt Ltd.

This is where TDS and final tax work together. Take the same case of withdrawing Rs 2 lakh after three years of service. At the time of withdrawal, around Rs 20,000 (10 percent of Rs 2 lakh) is deducted as TDS if PAN is provided, and you receive about Rs 1.8 lakh in hand.

However, this is not the final tax. At the end of the year, the full Rs 2 lakh is added to your total income. If you fall in the 20 percent tax slab, your tax on this amount would be around Rs 40,000. Since Rs 20,000 has already been deducted, you will need to pay the remaining Rs 20,000 while filing your return.

On the other hand, if you fall in the 5 percent tax slab, your total tax would be around Rs 25,000. In that case, since Rs 20,000 was already deducted, you will just have to pay Rs 5,000 more.

There are also higher deductions in certain situations. If PAN details are not provided, TDS can go up significantly.

“The applicable tax rate will be 10 percent or 34.608 percent, depending on whether Form 15G or 15H and PAN details are submitted,” Beik added.

In short, EPFO 3.0 may change how quickly and easily you can access your money, but it does not change how that money is taxed. The key factor remains the same, that is, how long you have stayed employed and contributed to your EPF account.