Tax on Provident Fund in India: What You Must Know

Tax on Provident Fund in India: What You Must Know

Provident Fund (PF) is a popular retirement savings tool in India, offering long-term financial security and tax benefits. While contributions and interest are generally tax-free, certain conditions can trigger tax liabilities—especially during withdrawals or early exits. This blog examines the key tax rules governing provident fund contributions, interest, and withdrawals to help you make informed financial decisions.

With a five-year lock-in period, they’re ideal for conservative investors seeking to grow their savings steadily. In this guide, we break down how tax-saving FDs work, their benefits, eligibility, and key considerations.

What is a Provident Fund (PF)?

 

A Provident Fund (PF) is a government-backed retirement savings scheme designed to help individuals build a financial cushion for their post-employment years. A portion of the employee’s salary is contributed to the fund, often matched by the employer. This pooled amount earns interest over time and can be withdrawn at retirement or under specific circumstances.

PF schemes offer long-term security, regular interest earnings, and tax benefits, making them a popular choice for salaried individuals planning for a stable financial future.

Types of Provident Fund

 

There are four main types of Provident Funds in India:

• Employees’ Provident Fund (EPF): Mandatory for salaried employees in eligible organizations, with contributions from both employee and employer.
• Public Provident Fund (PPF): A voluntary, long-term investment option open to all individuals, with government-fixed interest and tax-free returns.
• Voluntary Provident Fund (VPF): An extension of EPF where employees can contribute more than the mandatory limit.
• Statutory Provident Fund (SPF): Applicable to government employees and offers full tax exemption on contribution, interest, and maturity.

Each serves different needs, but all aim to promote disciplined savings.

When is PF Withdrawal Tax-Free?

 

PF withdrawals are tax-free under certain conditions. If you withdraw after completing five continuous years of service, the entire amount—contributions, interest, and employer share—is exempt from tax.

Transfers between employers during job changes do not break this continuity. In the event of premature withdrawal before five years, the amount may become taxable, and TDS may be applicable if the withdrawal exceeds ₹50,000.

Withdrawals due to health issues, job discontinuation, or company shutdowns may still qualify for exemption. Understanding these rules helps ensure tax efficiency while accessing your retirement savings.

Taxation on Interest Earned on PF

 

Interest earned on provident fund contributions is generally tax-free up to a limit. However, as of FY 2021–22, if an employee’s own annual contribution to EPF exceeds ₹2.5 lakh, the interest on the excess amount becomes taxable. For government employees in SPF, the limit is ₹5 lakh.

This move was introduced to curb high-income individuals from using PF as a tax-free investment vehicle. Interest on PPF remains tax-free up to the allowed contribution limit. Monitoring your contributions helps avoid unexpected tax liability on accrued interest.

How to Report PF Withdrawal in Income Tax Return

 

If you’ve withdrawn from your EPF account before completing five years of service, you may need to report the amount in your income tax return. Here's how to do it right:

• Report the employer’s contribution and interest under “Salary” income.
• Report your contribution (if claimed under Section 80C earlier) under “Income from Other Sources.”
• Report interest on your contribution also under “Income from Other Sources.”
• If TDS was deducted, reflect it in Form 26AS and claim credit.
• Use ITR-1 or ITR-2 based on your overall income profile.

Accurate reporting ensures compliance and avoids scrutiny from the tax department.

Tax Calculation on EPF

 

EPF withdrawals may be partially or fully taxable if withdrawn before five years of continuous service. Here's how taxation typically works:

• Employee’s contribution: Taxed only if claimed under Section 80C in earlier years.
• Employer’s contribution: Fully taxable as salary income.
• Interest on both contributions: Taxable under “Income from Other Sources.”
• TDS at 10% is applicable on withdrawals over ₹50,000 if PAN is furnished.
• No TDS if Form 15G/15H is submitted and conditions are met.
• Exemptions apply in cases like ill health or company closure.

Understanding this breakdown can help you plan withdrawals more strategically.

FAQs on Tax on PF Withdrawal

 

Q1. Is PF withdrawal taxable after 5 years of service?

No, if you’ve completed five continuous years of service, your entire PF withdrawal—both principal and interest—is exempt from tax under Section 10(12) of the Income Tax Act.

Q2. What happens if I withdraw my PF before 5 years?

If you withdraw PF before completing five years of continuous service, the amount may become taxable. Employer’s contribution, interest on both portions and claimed deductions under Section 80C may be taxed.

Q3. How much TDS is deducted on premature PF withdrawal?

TDS at 10% is deducted if the withdrawal amount exceeds ₹50,000 and PAN is provided. If a PAN is not furnished, TDS is deducted at a rate of 30%. You can avoid TDS by submitting Form 15G or 15H if eligible.

Q4. Do I need to show PF withdrawal in my ITR?

Yes, if your PF withdrawal is taxable, it must be reported in your income tax return. Different components are shown under salary or other income, depending on their nature.

Q5. Is interest earned on PF taxable?

Interest on PF is tax-free up to a specific contribution limit. For EPF, interest on employee contributions above ₹2.5 lakh annually (₹5 lakh for government employees) is taxable from FY 2021–22 onward.

AN Aug 24/25