EPF withdrawal tax-free after 5 years of service, experts advise

Queries from ET Wealth readers regarding Employees' Provident Fund (EPF) withdrawals and investment strategies have been addressed by financial experts.

For an individual with a Rs 32 lakh EPF corpus and over five years of continuous service who moved to a startup without PF, experts confirmed that the withdrawal would be tax-free under Section 10(12). However, retaining the corpus in the dormant EPF account was suggested as a prudent option, as it continues to earn tax-free interest of approximately 8.15% and is backed by a sovereign guarantee.

Transferring the EPF corpus to the National Pension System (NPS) was advised against, as only 60% of the NPS corpus is tax-exempt at maturity, compared to EPF's complete exemption. For those considering withdrawal and reinvestment, a diversified strategy was recommended, allocating 60-70% to equity mutual funds (subject to Long-Term Capital Gains tax of 12.5% above Rs 1.25 lakh under Section 112A), 20-30% to debt instruments, and 10% to liquid funds.

In response to a query from an individual who opted for voluntary retirement at age 46 after several years as an NRI, experts clarified that voluntary retirement does not qualify for tax-free EPF withdrawal. If EPF is withdrawn before completing five years of continuous service, the employee's own contribution is generally not taxed if deductions were claimed under Section 80C. However, the employer's contribution is taxed as salary income based on the individual's income tax slab, and the interest earned on both contributions is taxable under 'Income from other sources'. Tax Deducted at Source (TDS) of 10% applies if the withdrawal amount is Rs 50,000 or more and PAN is provided; otherwise, it is deducted at the maximum marginal rate.