EPF Withdrawal Before 5 Years: Know the Tax Rules and How to Avoid TDS Deductions

The Employees’ Provident Fund (EPF) is one of the most trusted savings schemes for salaried employees in India, designed to help them build a substantial retirement corpus. Both employees and employers contribute to this fund every month, while the government decides the interest rate annually. However, many employees often wonder whether withdrawing money from their EPF account before completing five years of service attracts tax.

Let’s break down the rules, contributions, and tax implications of early EPF withdrawals.

How EPF Contributions Work

The EPF account receives funds from three primary sources:

1. Employee Contribution: Every month, 12% of an employee’s basic salary plus dearness allowance (DA) is deposited into the EPF account.

2. Employer Contribution: The employer contributes an equal amount — another 12% — to the employee’s EPF account.

3. Interest Earned: The government announces an annual interest rate on EPF deposits. For FY 2024–25, the interest rate was 8.25%, making EPF one of the most attractive fixed-income savings options for working professionals.

The primary goal of the EPF is to ensure financial security after retirement. Upon retirement, the accumulated amount — including contributions and interest — is paid out as a lump sum, and if the employee has worked for over 10 years, they also become eligible for a pension under the Employees’ Pension Scheme (EPS).

Tax Rules on Early EPF Withdrawal

While EPF withdrawals are fully tax-free at the time of retirement, the same is not true for early withdrawals.

If an employee withdraws funds from their EPF account before completing five years of continuous service, the withdrawal amount becomes taxable.

Here are the key points to understand:

• TDS (Tax Deducted at Source): If the total withdrawal amount exceeds ₹50,000, a 10% TDS is deducted, provided the employee submits their PAN card details.

• If PAN is not provided, the TDS rate increases to 20%.

• However, if the withdrawal amount is below ₹50,000, no TDS is deducted, even if the service period is less than five years.

• If an employee’s total income falls below the taxable limit, they can submit Form 15G (for individuals) or Form 15H (for senior citizens) to avoid TDS deductions.

EPF Transfer Between Employers

When employees switch jobs, they are given the option to transfer their EPF balance from the old employer to the new one. This ensures continuity of service, which is essential for tax exemption.

If the total service period across multiple employers adds up to five years or more, no TDS will be deducted, even if the funds were accumulated under different companies.

However, many employees mistakenly withdraw their EPF after switching jobs instead of transferring it. This not only disrupts the continuity of service but also triggers tax liability — defeating the purpose of long-term retirement savings.

Why Avoid Premature EPF Withdrawals

Experts advise against early withdrawals unless absolutely necessary. The EPF is intended to provide financial stability post-retirement, and premature withdrawals can reduce long-term wealth accumulation due to loss of compounding interest.

Moreover, withdrawing before five years results in taxation on the following components:

• The employee’s own contribution (added to taxable income)

• Employer’s contribution and interest (taxed as “income from salary”)

• Interest on the employee’s contribution (taxed as “income from other sources”)

In short, early withdrawals not only lead to immediate tax outflow but also affect future financial planning.

Final Takeaway

The EPF scheme offers both security and tax benefits, making it an ideal long-term savings tool. To enjoy tax-free returns, employees should aim to keep their EPF investments intact for at least five years or transfer their funds when switching jobs instead of withdrawing them.

By maintaining consistency in contributions and understanding the tax implications, employees can maximize their retirement benefits and secure a stronger financial future.