Tax on pf withdrawal

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

04 January 2015 I understand that tax liability is not applicable when PF is withdrawn after completion of 5 years. However in my case scenario is little different.

I have changed my job after completing 4 and half years in April 2014 and joined a CA firm where there is no requirement of PF contribution. If I withdraw my PF balance now (i.e. January 2015) then would there be any liability on account of withdrawal since I have not completed continuous service of more than 5 years.

Kindly suggest the ways to avoid any tax liability.

Regards,
Anurag

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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04 January 2015 Tax liability will be there if withdrawn before 5 years. Withdraw the balance after 5 years. You can delay the withdrawal.

CA Kumar Mukesh

CA Kumar Mukesh (Expert)
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05 January 2015 Dear Mr. Seetharaman please change your opinion because it will be taxable, irrespective of fact whether or not it withdrawal within 5 years

Under section 10(13) under these circumstances are only exempt
(i) on the death of a beneficiary ; or
(ii) to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapa-citated prior to such retirement ; or
(iii) by way of refund of contributions on the death of a beneficiary ; or
(iv) by way of refund of contributions to an employee on his leaving the service in connection with which the fund is established otherwise than by retirement at or after a specified age or on his becoming incapacitated prior to such retirement, to the extent to which such payment does not exceed the contributions made prior to the commencement of this Act and any interest thereon;]

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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05 January 2015 The withdrawal of the accumulated balance from a recognized PF is taxable if the employee has not rendered continuous services for five years or more to the employer. While computing the continuous services of five years, the period of previous employment is also included, if the accumulated balance maintained with the old employer is transferred to the PF account of the new or current employer.

Querist : Anonymous

Querist : Anonymous (Querist)

11 January 2015 thanks Mr. Mukesh and Mr. Seetharaman. I would like to clarify that here I have continued my services for 5 years or more. I discontinued it after 4 and half years. As per your replies, it seems that it will be taxable if one is not continuing for 5 years or more.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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26 July 2025 Dear Anurag,

Thank you for the clarification. You’re absolutely right to seek clarity here, because **PF taxation rules can be a bit tricky**, especially when the **5-year condition is not fully met** and the **new employer doesn't offer PF**.

Let’s walk through your situation and the exact tax implications step-by-step.

---

## 📌 Your Scenario:

* You worked for **4.5 years** in your first job (April 2014 exit).
* You then joined a **CA firm that doesn’t deduct PF**.
* You're considering **withdrawing the PF balance in January 2015**.
* So, total **PF service period = 4.5 years**, and **no PF transfer** to the new employer is possible.

---

## ✅ Key Rule:

As per **Section 10(12)** and **Rule 8 of Part A of the Fourth Schedule** of the Income Tax Act:

> **PF withdrawal is tax-free** only if the employee has **rendered continuous service for 5 years or more**, **or** the PF balance is **transferred to the new employer’s PF account**.

Since in your case:

* There is **no transfer to the new PF account**, and
* You have **not completed 5 years** of PF service,

👉 The withdrawal in **January 2015 will be taxable**.

---

## 📌 What Portion is Taxable?

If PF is withdrawn **before 5 years**, then the **entire employer contribution**, **interest thereon**, and the **deduction claimed under Section 80C** in earlier years becomes **taxable**.

Here's how the breakup works:

| Component | Tax Treatment |
| ------------------------------------- | -------------------------------------------------------- |
| **Employee contribution** | Not taxable (your own money) |
| **Employer contribution** | **Taxable as salary** |
| **Interest on employer contribution** | **Taxable as salary** |
| **Interest on employee contribution** | **Taxable as income from other sources** |
| **80C benefit claimed earlier** | Will be **reversed and taxed** in the year of withdrawal |

🔹 TDS @ 10% will also apply if total withdrawal **exceeds ₹50,000** (rule as of FY 2016–17 onwards, but applicable retrospectively in practice).

---

## ✅ How to Avoid Tax on PF Withdrawal?

You have two realistic options:

### 1. **Delay Withdrawal Until 5 Years Have Passed (Since PF Start Date)**:

* You can **keep your PF account active**, and **do not withdraw**.
* EPFO will continue to pay interest on the balance for **up to 3 years** after your exit.
* Once the **5-year mark is crossed**, you can withdraw it **tax-free**.

✅ This is the **safest and most tax-efficient route**.

### 2. **Join a PF-registered employer within a year and transfer PF**:

* If within the next year or so, you join another organization where **PF is applicable**, you can **transfer** your old balance.
* Your service will be treated as **continuous**, and once the total crosses **5 years**, you can withdraw it tax-free.

---

## 📌 Summary:

| Situation | Tax on Withdrawal? | Action |
| ------------------------------------------ | ------------------ | ---------------- |
| < 5 years service + no transfer | ✅ **Yes**, taxable | Delay withdrawal |
| < 5 years but PF transferred to new job | ❌ **No**, tax-free | Preferred |
| 5+ years service (including old + new job) | ❌ **No**, tax-free | Fully exempt |

---

## ✅ Final Recommendation:

If possible, **wait until the 5-year period is completed** (counted from the date you joined your first PF job). You can then withdraw the amount **completely tax-free**.

Let me know if you’d like:

* A **tax calculation sheet** showing exact tax impact if you withdraw now.
* A **PF withdrawal delay letter** or **how to check your UAN/PF status** online.

Happy to assist.

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