Understanding EPF Taxation, Income Tax Liability, and TDS Provisions: Expert Insights

My friend was working in a company for 3+ years and applied for PF. Now she has received a letter from the company is pasted below.

Dear *****.

With ref. to your provident fund withdrawal form no.19 recd. by us, We would like to inform you that as your service is less than 5 years your provident fund company’s contribution will become taxable and your Income Tax liability is Rs.24781/- which will be deducted from your provident fund. Above subject, you are requested to refer Schedule IV part A of Income Tax Act 1961.

Balance of your PF accumulation is as under:

Employees Contribution- Rs. 56175/-
Company Contribution - Rs. 34542/-
Tax on the above amount- Rs. 24781/-

If you transfer your provident fund from Reliance Infocomm Ltd EPF to your present employer ( if employed ) then Income Tax liability will be Zero.

Please Note that if we do not receive reply in one month we will deduct the above mentioned tax amount and process your PF settlement.

Please confirm ASAP.

Is it taxable?

Kindly advice me.

They are correct. Before deducting the taxable amount, they have sent you the reminder, which shows genuineness in their approach. In any case, P.F. cannot be withdrawn until 5 years' time, whether you are working in the same company or have changed several companies thereafter. If you withdraw, then it is taxable because it is a long-term investment (bhavishya nidhi).

I would suggest transferring the accumulated amount to the new P.F. account allotted by your current company. By doing this, firstly, your PF will be exempted from IT, and secondly, your pensionable service will accrue.

What are the TDS provisions applicable on Trusts?

TDS on settlement of Provident Fund Trust:

As per the provisions of rule 8, 9 and 10 of The Part 'A' of the Fourth Schedule of the Income-Tax Act, 1961, in the following cases, no TDS would be applicable:

i) If an employee has rendered continuous service with their employer for a period of five years or more, or

ii) If, despite not having rendered such continuous service, the service has been terminated due to the employee's ill-health, or by the contraction or discontinuance of the employer's business or other causes beyond the employee's control, or

iii) If, upon the cessation of employment, the employee secures employment with another employer, to the extent the accumulated balance due and becoming payable is transferred to their individual account in any recognized provident fund maintained by the new employer, or

iv) If the accumulated balance due includes any amount transferred from the employee's individual account in any other recognized provident fund maintained by former employer(s), then the period of continuous service under the former employer(s) is included in the computation.

If the settlement falls into any of the above categories, no TDS would be deducted. Otherwise, TDS would be calculated as follows:

i) Add the employer's contribution, interest on the employer's contribution, and interest on the employee's contribution for the relevant financial years to the employee's other incomes;

ii) Calculate the tax liability for all the years by applying the relevant slab for the concerned financial year;

iii) Calculate the difference between the tax liability before and after the inclusion of the amounts from (i) above;

iv) Revert the rebate taken by the employee on their contribution under section 88 as per the criteria mentioned.

v) Apply the surcharge applicable for the financial year in which the settlement is made on the amounts from iii) and iv) above.

TDS Provisions Applicable on Superannuation Trust:

As per the provisions of rule 6 of The Part 'A' of the Fourth Schedule of the Income-Tax Act, 1961, TDS has to be calculated at the settlement time except in the following cases:

i) On the death of the beneficiary; or

ii) To an employee in lieu of or in commutation of an annuity on retirement at or after a specified age or on incapacity prior to retirement.

Tax would be deducted at the average rate of tax, calculated as per section 2(10), applied over the settlement amount with the financial year's surcharge.

Following the TDS deductions, the trust must issue a certificate of deduction in Form No. 16 by April 30 of the following financial year, and file an annual return in Form No. 24 & 22 by May 31 of the following financial year for provident fund trust & superannuation trust respectively.

Regards,

Venkatesh.P

Please ask your friend to go and Meet your local EPF commissioner and show him this letter immediately. No need to ask or say anything else... EPFC will take action because in that case there is a need to take serious action against employer.