Taxability of EPF Withdrawal

Last Updated on December 23, 2025

Provident Fund is a statutory retirement benefit for employees designed to secure the long-term financial security of salaried individuals. Although EPF has tax advantages during the contribution and interest accumulation phases, it is not taxed during the withdrawal phase, but is subject to taxation. This has caused confusion to many taxpayers since not all withdrawals made under EPF are totally tax-free. Taxability is subject to the continuous period of service, the withdrawal purpose, and adherence to the provisions of the income tax law. A detailed, yet easy-to-understand explanation, with limited headings and meaningful pointers, is also provided below.

Understanding Taxation of EPF Withdrawal

1. EPF withdrawal is fully tax-free in terms of the employee working five years of continuous service, including service of the former employers, in case the EPF balance is transferred and not withdrawn.
2. In case the employee withdraws EPF prior to five years, the withdrawal will either be taxable in full or in part.
3. The service is considered continuous when there is a change in occupation, even if the EPF account is transferred.
4. It depends on the cause of terminating employment, either through resignation, termination, sickness, or even the winding up of business, which has a direct impact on taxability. Rules of income taxes and EPF work in tandem towards exemption/taxation.

The EPF withdrawal taxation is based on this five-year rule.

EPF Withdrawal After Completion of 5 Years of Service

When EPF is withdrawn after completing five years of continuous service, the withdrawal is treated as fully exempt under the income tax law.

1. The employee’s own contribution, which was deducted from salary, is not taxed at the time of withdrawal
2. The employer’s contribution, which otherwise forms part of the salary, is also fully exempt
3. Interest earned on both employee and employer contributions remains tax-free
4. No TDS is deducted by EPFO at the time of payment
5. The withdrawn EPF amount does not increase the individual’s taxable income

This makes EPF one of the most tax-efficient retirement savings instruments, especially when service continuity is maintained.

EPF Withdrawal Before Completion of 5 Years of Service

If EPF is withdrawn before completing five years of continuous service, it generally becomes taxable unless specific exemptions apply.

1. The employer’s contribution is treated as salary income because it was never taxed earlier
2. Interest earned on the employer’s contribution is also taxed as salary income
3. The employee’s contribution becomes taxable if a deduction under Section 80C was claimed earlier
4. Interest on the employee’s contribution is taxed under the head “Income from Other Sources”
5. The taxable amount is added to the total income of the individual in the year of withdrawal

Such taxation can significantly increase tax liability, especially if the withdrawal is large.

Exceptions Where EPF Withdrawal Remains Tax-Free Even Before 5 Years

1. Termination of employment due to prolonged illness or medical incapacity
2. Closure of the establishment or discontinuation of employer’s business
3. Termination due to reasons beyond the control of the employee
4. Death of the employee, where EPF is received by nominee or legal heir

In these cases, the withdrawal is treated as a social welfare benefit and remains exempt.

TDS Provisions on EPF Withdrawal

Tax Deducted at Source (TDS) applies to EPF withdrawal only under specific circumstances.

1. TDS is applicable if the employee has not completed five years of continuous service
2. The total EPF withdrawal amount exceeds ₹50,000
3. The employee provides PAN at the time of withdrawal

In such cases:

1. TDS is deducted at 10% if PAN is furnished
2. TDS is deducted at 30% if PAN is not furnished

Situations Where TDS Is Not Deducted

• EPF withdrawal after completion of five years
• Withdrawal due to death, illness, or closure of the establishment
• Withdrawal amount is ₹50,000 or less

Form 15G and Form 15H

• These forms can be submitted to avoid TDS if the total income is below taxable limit
• Form 15G is for individuals below 60 years of age
• Form 15H is for senior citizens
• Submission of these forms does not make taxable income exempt; it only avoids TDS deduction

Partial EPF Withdrawal and Interest Taxation

Partial EPF withdrawals are generally allowed for specific purposes and are mostly tax-free.

• Partial withdrawal for medical treatment of self or family is tax-exempt
• Withdrawal for higher education of self or children is tax-free
• Withdrawal for marriage of self, children, or siblings is exempt
• Withdrawal for purchase, construction, or repayment of a home loan is tax-free
• Such withdrawals do not attract TDS and do not increase taxable income

Tax Treatment of Interest

1. Interest earned on EPF remains tax-free if the overall withdrawal is tax-free
2. Interest becomes taxable only when EPF withdrawal itself is taxable
3. Interest on employee contribution is taxed as “Income from Other Sources” in premature withdrawal cases

Disclosure, Common Mistakes, and Tax Planning Tips

Disclosure in Income Tax Return

1. Tax-free EPF withdrawal should still be disclosed under exempt income
2. Taxable EPF withdrawal must be correctly shown under salary or other sources
3. TDS deducted must match Form 26AS
4. Non-disclosure may result in income tax notices or scrutiny

Common Mistakes to Avoid

1. Believing EPF withdrawal is always tax-free
2. Withdrawing EPF instead of transferring during a job change
3. Ignoring continuous service across employers
4. Not checking whether TDS has been deducted
5. Failing to report EPF withdrawal in ITR
6. Submitting Form 15G or 15H without meeting eligibility

Tax Planning Tips

1. Avoid EPF withdrawal before completing five years wherever possible
2. Transfer EPF balance when changing jobs instead of withdrawing
3. Understand exemption conditions before applying for withdrawal
4. Verify the employer’s tax computation carefully
5. Seek professional advice for high-value EPF withdrawals

Conclusion

The taxability of EPF withdrawals in India is primarily determined by the length of service and the reason for withdrawal. An EPF withdrawal after five years is fully tax-free, whereas a premature withdrawal may result in tax and TDS implications. Partial withdrawals for permitted purposes remain exempt. With proper planning, EPF transfer during job changes, awareness of exemptions, and correct disclosure in income tax returns, individuals can fully enjoy the tax benefits of EPF and avoid unnecessary financial burden.

Related Services

• EPF Return Filing
• ITR Filing Online
• TDS Return Filing