EPF Withdrawal Before 5 Years: How Much Income Tax You Pay and What the Rules Say

Employees’ Provident Fund (EPF) is one of the most reliable retirement savings tools for salaried individuals. However, many employees are unsure about the tax implications when they withdraw their EPF balance before completing five years of continuous service. According to EPF rules, early withdrawal can attract income tax, and in some cases, a significant TDS (Tax Deducted at Source) may be levied. Here is a detailed explanation of the regulations, TDS rates, exemptions, and how EPFO calculates the service period.

How Much Tax Is Deducted on EPF Withdrawal Before 5 Years?

If an employee withdraws their EPF amount before completing five years of continuous service, the withdrawal becomes taxable. In such cases, EPFO generally deducts TDS on the withdrawal amount.

TDS rates applicable:

• 10% TDS if the employee has submitted a valid PAN

• 34.608% TDS if the employee fails to provide PAN

This tax is deducted on:

• Employee’s contribution

• Employer’s contribution

• Interest earned on both contributions

The high TDS rate without PAN often surprises many employees withdrawing funds early.

Cases Where No TDS Is Deducted

EPFO does not deduct tax in the following situations:

1. PF is transferred from one employer’s account to another PF account.

2. Employee’s service ends due to circumstances beyond their control, such as:

   • Medical conditions

   • Company closure

   • Completion of a project

3. EPF is withdrawn after completing 5 years of service.

4. Withdrawal amount is below ₹50,000, even if service is less than 5 years.

5. Withdrawal amount is ₹50,000 or more, service is less than 5 years, but the employee submits Form 15G or Form 15H along with PAN, declaring non-taxable income.

How EPFO Calculates the 5-Year Service Period

The five-year rule considers continuous service, and EPFO includes the following in service duration:

• Past service with previous employers, if the PF has been transferred

• Service breaks due to:

  • Illness

  • Accident

  • Legal strike

  • Approved leave

These breaks do not disrupt the continuity of service for tax calculation.

Tax Benefits Available Under EPF

EPF enjoys triple tax benefits, making it one of the most tax-efficient investment options:

1. Contribution:
   Under the old tax regime, up to ₹1.5 lakh per year is eligible for deduction under Section 80C.

2. Interest Earned:
   Interest on EPF is tax-free as long as the employee meets eligibility rules.

3. Maturity Amount:
   After completing five years of service, both the interest and final maturity amount become completely tax-free.

EPF is categorized under the EEE (Exempt-Exempt-Exempt) tax framework.

Under the new tax regime, only employer’s contribution (up to 12% of Basic + DA) qualifies for deduction.

Conclusion

Withdrawing EPF before five years can result in significant tax deductions, especially if PAN is not provided. However, exemptions are available in genuine cases such as illness, company shutdown, or transfer of PF. Employees should carefully evaluate the tax implications before initiating an early withdrawal, as staying invested for five years or longer ensures complete tax exemption on both interest and maturity value.

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