TDS on withdrawn of EPF before 5 years & International Employees Exemption

[Jugal Patel]

TDS on Employees Provident Fund withdrawn before 5 years & International Employees Exemption

Provident fund is a kind of security fund in which the contribution is made for the employee’s welfare by the employee and the employer. Under the Employees Provident Fund Act, 1952, certain specified employers are required to comply with the Employees Provident Fund Scheme, 1952. However, these employers are also permitted to establish and manage their own private provident fund (PF) scheme subject to fulfilment of certain conditions. This provident fund scheme is known as Recognised Provident Fund (RPF) under the Act.

Under the existing provisions of rule 8 of Schedule IV, Part A, the withdrawal of accumulated balance by an employee from the RPF is exempt in the hands of employee in the following situations -

■		If the employee has rendered continuous service with his employer for a period of 5 years or more. For the purpose of calculating 5-year time-limit, service rendered with the previous employer shall be included, if the previous employer also maintained recognized provident fund and the provident fund balance of the employee was transferred by him to the current employer.
■		If the employee has been terminated because of certain reasons which are beyond his control (e.g., ill health of the employee, discontinuation of business by employer, completion of project for which the employee was employed, etc.).
■		If the employee has resigned before completion of 5 years but he joins another employer (who maintains recognized provident fund and provident fund money with the current employer is transferred to the new employer).
■		If the entire balance standing to the credit of the employee is transferred to his account under a Pension scheme referred to in Sec 80CCD & Notified by Central Govt. (i.e. NPS)

If the employee makes withdrawal before continuous service of 5 years (other than the cases given above), such withdrawal shall be treated as unrecognized provident fund withdrawal. Unrecognized provident fund withdrawal (excluding employee's contribution) is taxable (hereinafter referred to as "taxable premature withdrawal").

The Finance Act, 2015 had Inserted a new section 192A regarding the TDS (Tax Deduction at Source) on payment of accumulated provident fund balance due to an employee, the provision shall take effect from 01.06.2015.

Who is liable for TDS deduction - Tax is to be deducted by the trustees of Employees' Provident Fund Scheme, 1952 or any other person authorised under the scheme to make payment of accumulated sum to employees.

Which amount is subject to tax deduction - Tax is deductible from "taxable premature withdrawal". In other words, tax is deductible from accumulated lump sum payment (at the time of retirement or at the time of leaving job) in case the employee has not rendered continuous service of 5 years (and he does not fall in any of the 4 cases given in above). Out of the lump sum payment, only amount includible in the total income of the employee (i.e. Employer’s Contribution & Interest on Employers & Employee Contribution) is subject to tax deduction at source. (refer example given below in conclusion). As the employee’s contribution is not income it is set aside amount of Contribution to PF. Also, Employee’s Contribution is considered as deduction u/s 80C & when EPF is withdrawn before 5 years of service then such deductions are withdrawn & TDS is taken care by Section 192(4) which says tax on disallowance of 80C of previous year should be deducted in the year in which EPF is withdrawn.

Definition as per Part A of Forth Schedule of Income Tax Act of "accumulated balance due to an employee" means the balance to his credit, or such portion thereof as may be claimable by him under the regulations of the fund, on the day he ceases to be an employee of the employer maintaining the fund

Time of tax deduction - Tax is deductible at the time of payment.

Rate of TDS - Tax is deductible under section 192A at the rate of 10 per cent of "taxable premature withdrawal".

If PAN of the recipient is not available, tax is deductible at the maximum marginal rate of tax.

What is threshold limit - Tax is not deductible if "taxable premature withdrawal" is less than ₹ 50,000.

No deduction of tax at source - No deduction of tax is to be made if the recipient of income furnishes a declaration in writing in duplicate in prescribed form [Form No. 15G].

Foreign nationals exempt from Provident Fund subject to specific condition

Foreign National i.e. International Workers (IWs) working in establishments in India to which Employees’ Provident Fund (PF) regulations apply are required to contribute to the PF except those who have been specifically exempted under the regulations. There is an exception to the Employees from countries with whom India has signed Social Security Agreements (SSA), contributing towards the social security of their home country and holding Certificate of Coverage (COC) from their home country will not be required to contribute towards the Indian social security. As per the provisions of the PF scheme, both employer as well as employee will contribute 12% of monthly pay (as defined). Salary will include the total salary whether received in India or abroad.

Conclusion

1. No TDS in respect of the following cases: -

·  Transfer of PF from one account to another PF account.

·  If Entire Balance of PF is transferred by employee to his NPS account

· Termination of service due to Ill health of member /discontinuation of Business by employer/completion of project/other cause beyond the control of member.

·  If employee withdraws PF after a period of five year.

· If PF payment is less than ₹ 50,000/-( w.e.f. 01/06/2016 earlier it was ₹ 30,000/-) but the member has rendered service of less than 5 years.

· If employee withdraws amount more than or equal to ₹ 50,000/-, with service less than 5 years but submits Form 15G/15H along with their PAN.

2. No EPF deduction in case IWs working in India having Social security coverage in their home country & having SSA with India.

Example :- Mr. A join Company X on April 16, 2015 (salary being ₹ 1,00,000/- per month. X Company contributed 12% of Salary towards recognised provident fund. Mr. A also makes same contributions. Mr A makes ₹ 1,20,000/- towards LIC u/s 80C & Medical Premium ₹ 10000/- u/s 80D. Mr A resigns on 31^st December 2016.

Accumulated Balance on PF of Mr A is ₹ 5,30,000/- (i.e. Contribution of X Company 2,40,000/- Interest thereon ₹ 25,000/- Contribution of A 2,40,000/- interest thereon ₹ 25,000/-). The Accumulated Balance is paid on 10^th January 2017. Lets determine the amount of TDS working & take two situations

Situation 1:- PF is managed by PF Commissioner under EPF Scheme, 1952

Situation 2:- Company X has taken exemption u/s 17 & PF is managed by its PF trust through there own.

Assumptions below

1. Mr A is not employed by any other person previously & doesn’t have any PF account before this.
2. Mr A is not joining any company after resignation.
3. The service of A is not terminated because of reasons beyond his control.
4. Mr A has not transferred entire Balance of PF to NPS account before 31 Dec 2016

Situation 1

Calculation of TDS

	TDS by Employer under section 192	TDS by EPFS under 192A
Salary (Rs 100000x9months)	9,00,000	0
Any other Income EPF Withdrawn (240000+25000+25000)	-	2,90,000
Gross Total Income	9,00,000	2,90,000
Deduction u/s
80C-LIC	1,20,000
80D-Medical Premium	10,000
Income Subject to TDS	7,70,000	2,90,000
Tax on Regular rate on 7,70,000	81,370
Tax on withdrawn of Deduction u/s 80C for the earlier year as calculated below	8,240
Tax to be deducted(*290000x10%)	89,610	29000*

 

Tax on withdrawn of Deduction u/s 80C for the earlier year
	Tax Liability as originally calculated considering Deduction u/s 80C	Recomputation of Tax liability (Considering EPF as unrecognised EPF i.e. not allowing 80C)
Salary (Rs 100000x11.5 months)	11,50,000	11,50,000
Any other Income	-	-
Gross Total Income	11,50,000	11,50,000
Deduction u/s
80C-LIC	1,20,000	1,20,000
80C-EPF (total ₹ 1,38,000 being 12% of ₹ 11,50,000/- but maximum upto ₹ 1,50,000/- in 80C)	1,38,000	Nil (due to EPF premature withdrawn)
80D-Medical Premium	10,000	10,000
Income Subject to TDS	9,90,000	10,20,000
Tax on Regular rate on 9,90,000	1,26,690	1,34,930
Difference in Tax of ₹ 8,240 (134930-126690) will be recovered by way of TDS under section 192 in the FY 2016-17

Situation 2:- Under this case PF is maintained by Company. TDS under 192A is not applicable. TDS under 192 by the employer company will be deducted as follows

Calculation of TDS

	TDS by Employer under section 192
Salary (Rs 100000x9months)	9,00,000
EPF Withdrawn (Employer’s Contribution)	2,40,000
Interest on EPF (Employer’s)	25,000
Any other Income Interest on EPF employees part 25000	25,000
Gross Total Income	11,90,000
Deduction u/s
80C-LIC	1,20,000
80D-Medical Premium	10,000
Income Subject to TDS	10,60,000
Tax on Regular rate on 10,60,000	1,47,290
Tax on withdrawn of Deduction u/s 80C for the earlier year as calculated below	8,240
Tax to be deducted	1,55,530

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