Employees’ Provident Fund (EPF) withdrawals are exempt from tax if you have completed at least five years of continuous service. However, if you withdraw your EPF balance before that period, except in certain situations, the amount becomes taxable in your hands.
If you have made such a withdrawal during FY 2025-26, it is important to report it correctly while filing your income tax return (ITR) for AY 2026-27 to avoid notices or incorrect tax computation.
How does provident fund work after EPF-2026?
EPF is a popular retirement savings scheme in which both employers and employees contribute some amount every month.
Under the previous EPF rules, an employee typically contributed 12% of their basic salary and dearness allowance (DA), while the employer made a matching contribution. But after was notified, employees are required to contribute a fixed ₹1,800 per month and the employer will make a matching contribution. Any contribution above ₹1,800 should be voluntary for both the employee and the employer.
The employer’s share is split between the EPF account and the Employees’ Pension Scheme (EPS). EPF deposits current earn and annual interest rate of 8.25% per annum.
Although EPF is primarily meant for retirement, employees can make partial or full withdrawals under certain circumstances such as unemployment, medical emergencies or other major expenses.
How are EPF withdrawals taxable before 5 years?
If you withdraw from EPF before completing 5 years of continuous service, the withdrawal amount is generally taxable, according to Rule 6 of schedule XI of Income-tax Act, 2025.
However, tax exemption is available in certain exceptional situations, such as:
- Termination of employment due to ill health
- Closure or discontinuance of the employer’s business
- Any other circumstances beyond the employee’s control.
If you have not completed five years and do not satisfy the conditions mentioned above, whatever money you withdraw along with the interest will become taxable in your hand, according to information available on the official income tax portal.
Additionally, no will be deducted when the withdrawn amount is less than ₹50,000. In calculating 5 years of service, your tenure with the previous employer is also included. If you transfer your EPF balance from the old employer to a new employer and your total employment is 5 years or more, no TDS is deducted.
Rates of TDS
If EPF is withdrawn before completing five years of continuous service and the withdrawal amount exceeds ₹50,000, TDS is deducted at 10% provided the employee has furnished PAN details. If PAN is not available, then TDS may be deducted at a higher rate of 20%, according to ClearTax.
However, employees whose total taxable income, including the EPF withdrawal amount, falls below the taxable limit can submit Form 121 to avoid TDS deduction. In such cases, no TDS is deducted if the form is validly submitted.
How to report premature EPF withdrawal proceeds in tax return
Taxpayers who have withdrawn their before completing five years of continuous service should not report the proceeds as a lump sum in their tax return this year as different components of the withdrawal are taxed under different heads of income. Here’s how it works:
- An employee’s contribution: This is the amount contributed by you to your EPF. This portion of your withdrawal is not taxable.
- Interest on your/employee’s contribution: This portion is taxed as income from other sources in the tax return.
- Employer’s contribution and interest on it: It is fully taxable under the head salary in your tax return. When TDS is deducted on it, you will be able to see an entry under salary TDS in your Form 26AS for it.