Tax implications on withdrawal of EPF and NPS

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NB (Querist)
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03 February 2025 Dear Experts. I have seen / heard conflicting comments on this issue. Hence bringing it up to the CA experts here. Appreciate if more experts share their views on the below

1. EPF: As per EPFO rules, a salaried employee can continue his EPF membership without any restrictions. However if no contribution is received in the account for 3 consecutive years, after 3 years no interest will be earned. Income Tax Act says EPF withdrawal upon retirement is tax free. Given this situation, in case of an employee who works with a company for more than 5 years, retires at age 60, does not withdraw the EPF accumulation until age 63, will the interest earned between age 60 and 63 be a tax free income or is it taxable?
2. NPS: Upon retirement at 60 years, a subscriber can withdraw 60% of the corpus as a lumpsum, which is tax free and has to take an annuity for the balance 40%. PFRDA has recently introduced a new withdrawal option “Systematic Lumpsum Withdrawal (SLW)”. Under SLW, a subscriber can make the withdrawals in a phased manner instead of a lumpsum. Withdrawals can be made monthly, quarterly, half yearly or annually upto age 75. If a retiree opts for SLW, are the returns earned during the deferment period tax free? Deferment period refers to time from age 60 upto period when SLW ends, max 75 years.

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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04 February 2025 1 It's taxable.
2 It's tax free.

NB (Querist)
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04 February 2025 Thank you sir for your response. Just wondering if other colleagues have any difference of opinion?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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12 August 2025 1. EPF Withdrawal & Interest Taxability
EPF Withdrawal at Retirement (age 60): The accumulated corpus including interest up to retirement is tax-free if withdrawn after 5 continuous years of service.

Interest earned post-retirement (age 60 to 63) on the EPF balance if not withdrawn immediately:

As per CBDT Circular No. 02/2016, interest credited after retirement (if the amount remains invested in the EPF account beyond retirement) is taxable in the hands of the employee.

So, interest earned after retirement till withdrawal (age 60 to 63) is taxable as “Income from Other Sources” for those years.

Summary:

Withdrawal after retirement = tax-free (principal + interest earned till retirement)

Interest accrued after retirement = taxable

2. NPS Withdrawal & Taxability on Systematic Lumpsum Withdrawal (SLW)
Standard NPS Withdrawal at 60:

Up to 60% lumpsum withdrawal at retirement is tax-free.

The remaining 40% must be used to purchase an annuity, which is taxable as pension income when received.

Systematic Lumpsum Withdrawal (SLW) introduced by PFRDA:

Allows phased withdrawals from 60 up to age 75 instead of a lump sum.

The taxability depends on the nature of the amount withdrawn:

The corpus portion (principal) withdrawn during SLW is tax-free.

The returns (interest, gains) earned on corpus during deferment and withdrawal phase are taxable as per income tax rules.

Since SLW amounts include both principal and returns, the returns portion will be taxable as income in the year of receipt.

Summary:

Principal portion under SLW = tax-free

Returns/interest portion under SLW = taxable as income when received

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