If you withdrew your Employees' Provident Fund (EPF) balance before completing five years of continuous service, the withdrawal is generally taxable and must be reported in your Income Tax Return (ITR) for Assessment Year (AY) 2026-27. According to CA Abhishek Soni, CEO & Co-founder of Tax2win, different components of the EPF corpus are taxed under different heads of income. The employer's contribution along with interest earned on that contribution should be reported under 'Salary Income', while interest earned on your own contribution should be disclosed under 'Income from Other Sources'. However, your own EPF contribution is not always taxable - it becomes taxable only if you claimed a deduction under Section 80C for it in previous years.
For example, suppose you withdraw ₹5 lakh from your EPF account after working for three years. Out of this, ₹2 lakh is your own contribution, ₹2 lakh is your employer's contribution, and ₹1 lakh is the interest earned. The employer's contribution and interest earned on it will be taxed as Salary Income, while the interest earned on your own contribution will be taxed under Income from Other Sources. Your own contribution will be taxed only if you had claimed a deduction under Section 80C in earlier years.
If the Employees' Provident Fund Organisation (EPFO) deducted TDS on your PF withdrawal, generally 10% if your PAN was available and the taxable withdrawal exceeded ₹50,000, make sure you claim the TDS credit while filing your ITR. However, employees whose total taxable income, including the EPF withdrawal amount, falls below the taxable limit can submit Form 121 to avoid TDS deduction. Additionally, no TDS will be deducted when the withdrawn amount is less than ₹50,000.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. From AY 27, Form 121 replaces the erstwhile Form 15G and Form 15H, creating a unified form for all taxpayers across ages.
Tax exemption is available in certain exceptional situations when withdrawing before five years of service. These include termination of employment due to ill health, closure or discontinuance of the employer's business, and any other circumstances beyond the employee's control. According to information available on the official income tax portal, if you have not completed five years and do not satisfy these conditions, whatever money you withdraw along with the interest will become taxable in your hand. The employer's share is split between the EPF account and the Employees' Pension Scheme (EPS), with EPF deposits earning an annual interest rate of 8.25% per annum.
For taxpayers who have withdrawn their EPF balance before completing five years of continuous service, simply reporting the withdrawal as a lump sum in the ITR may not be sufficient. Since different components of the withdrawal are taxed under different heads of income, it is important to disclose each component correctly. Taxpayers should also reconcile the TDS deducted by the EPFO with Form 26AS or the Annual Information Statement (AIS) and claim the credit while filing their return to avoid paying excess tax or missing out on a refund. The filing process requires careful separation of employee contributions, interest on own contributions, and employer contributions with their respective tax implications. For online claims, processing takes 3-7 working days for approval, while offline physical claims submitted to EPFO office can take up to 20 working days.
