Withdrawing your PF? You could lose 30% to taxes if you don't plan your withdrawals carefully

Every year, Indians withdraw over Rs 1 lakh crore from their Employees' Provident Fund (EPF) accounts—but many don’t realise it could trigger a tax liability of up to 30% in certain situations. While EPF is popularly believed to follow the EEE (Exempt–Exempt–Exempt) model of taxation, this tax-free status isn’t guaranteed across the board.

Withdrawal of Provident Fund (PF), particularly Employee Provident Fund (EPF), is typically permitted upon retirement or during periods of unemployment. Full withdrawal of your EPF balance is allowed upon retirement, typically at age 58. Alternatively, if you are unemployed for more than two months, you may withdraw the entire accumulated balance. Partial withdrawals are also an option under specific conditions, such as medical emergencies, home purchases, or higher education, but these may be subject to certain regulations and potential tax implications.

Sujit Bangar, Founder, Tax Buddy, said under the EEE model, contributions to EPF are tax-exempt under Section 80C or 80CCD, the interest earned during the accumulation period is tax-free, and withdrawals at maturity are also exempt. However, there are critical exceptions that can turn your retirement safety net into a tax trap.

When is EPF withdrawal tax-free?

EPF withdrawals are fully tax-exempt if you’ve completed five or more years of continuous service. The same applies in cases of retirement, severe health issues, or if your employer shuts down operations. But if you withdraw your PF before five years of service, you could face multiple layers of taxation.

In premature EPF withdrawals (before five years), your employer’s contribution and the interest on it are taxed as salary. Your own contribution remains exempt—unless you claimed tax deductions under Section 80C, in which case it’s added to your income and taxed accordingly. Interest on your own contribution is also taxable under "Income from Other Sources."
 

Additionally, if your PF withdrawal exceeds Ra 50,000, the EPFO deducts TDS at 10%.

Withdrawals for specific needs

EPF can be tapped for purposes like marriage, education, housing, or medical emergencies. These withdrawals are typically non-taxable if they comply with EPFO rules and do not reverse any previous tax benefits availed under Section 80C.

Full Withdrawal

Retirement: Upon reaching the retirement age, you have the option to withdraw your entire EPF balance.
Unemployment: If you remain unemployed for two consecutive months, you are eligible to withdraw the full amount.

Partial Withdrawal

Medical Emergencies: In case of medical emergencies, you can withdraw a portion of your EPF balance for treatment, subject to specific regulations.
Home Purchase: For the purchase of a house or repayment of a home loan, you can withdraw a portion of your EPF balance.
Higher Education: You can withdraw a portion of your EPF balance for your own or your children's higher education.
Marriage: A portion of your EPF balance can be withdrawn for marriage expenses.

NPS withdrawal rules

The National Pension System (NPS) has its own tax dynamics. Upon retirement, 60% of the corpus can be withdrawn tax-free, while 40% must be used to purchase an annuity, which is taxed as regular income. If you exit NPS before age 60, only 20% is tax-free; 80% must be annuitised, and the income from it is taxable. A full withdrawal is only allowed if the corpus is less than ₹2.5 lakh.

TDS

In the event of premature withdrawal of your EPF balance (prior to retirement or after less than two months of unemployment), it may be subjected to Tax Deducted at Source (TDS). If you do not qualify for TDS exemption (e.g., if you have not contributed for five years or if the withdrawn amount exceeds a specified threshold), you may have to pay TDS.

Online Withdrawal

Initiate the PF withdrawal process conveniently online via the EPFO portal. You will require your UAN (Universal Account Number) and other necessary details to complete the process successfully.

Offline Withdrawal

Alternatively, you can opt for an offline PF withdrawal by submitting the appropriate application form to your employer.

Smart planning tips

Bangar said to avoid unnecessary tax hits:

Don’t withdraw EPF before completing 5 years of service.

Use Section 80CCD(1B) for an additional Rs 50,000 NPS tax deduction.

Plan your annuity income stream wisely post-retirement.