Why Financial Advisors Recommend Early Withdrawal of PF

Financial Advisors

Financial advisors strongly encourage employees to refrain from withdrawing their Provident Fund (PF) prior to retirement to avoid future financial difficulties. Governments have introduced regulations in line with this advice, ensuring that PF funds are only accessible after retirement, protecting individuals from financial hardship after retirement. However, in certain circumstances early withdrawal is permitted and there are tax consequences associated with it. Let’s take a closer look at the details of these regulations.

Under the Employees’ Provident Fund and Miscellaneous Act 1952, 12% of an employee’s base salary is contributed to the PF. According to Employee Provident Fund Organization (EPFO) regulations, if she has been continuously employed by the same employer for at least 4.5 years, she can transfer the full amount from her current PF account to a new account opened. . with another employer. If an employee withdraws funds from her previous account after opening her new PF account, the amount withdrawn is subject to taxation according to income tax laws. However, you do not have to pay taxes on the transferred amount.

Combining PF accounts is a necessary step when transitioning between jobs. Upon starting a new employment, an individual receives a Universal Account Number (UAN) from her EPFO. Based on this her UAN, the employer will open her PF account and both the employee and the company will contribute monthly. When changing jobs, the employee gives her UAN to the new employer and the employer opens another her PF account with the same her UAN. At a later stage, it is important to merge her previous PF account with the newly opened account.

Tax liability is based on the holding period of the PF account. If an individual withdraws funds from her PF account after her 5 years, the withdrawal will be completely tax-free. However, if it is withdrawn before the expiration of the five years, it will be taxable. For early withdrawals within her first five years, a 20% tax deduction applies if the subscriber’s her PAN card is not linked to the account. Conversely, if the PF account is linked to PAN, a 10% withholding tax (TDS) will be imposed.

Exceptions to tax payment are allowed in certain circumstances. Employees do not have to pay taxes if they had to leave their jobs due to ill health, business closure by their employer, or other reasons beyond their control. In such cases, no tax will be charged when withdrawing funds from the PF account. Similarly, if an employee changes jobs and transfers PF funds from an old account to a new account opened with the new employer, no tax liability will arise.

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First published: May 18, 2023, 17:21 IST

Last update: May 18, 2023, 17:21 IST

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