TDS from premature withdrawal from Employees’ Provident Fund Scheme (EPFS): Sections 192A and 197A

When an employee participating in a Recognised Provident Fund (RPF) withdraws the accumulated balance lying to her/his credit in the said RPF account, that amount is not included in her/his total income and is considered as exempt provided certain conditions are met.

The main condition is that such a person should have rendered continuous service with that employer for a period of five years or more. In case of cessation of employment, if the employee takes up an employment with another employer and the accumulated balance in her/his RPF account is transferred to her/his RPF account maintained by such other employer, then also the exemption would be available.

It therefore follows that if the abovementioned conditions are not satisfied, the accumulated balance due to the employee is taxable in the  hands of the employee. In such a case, tax is required to be calculated by re-computing the tax liability of the years for which the contribution to RPF has been made, by treating the same as contribution to unrecognised provident fund.

The trustees of an RPF are required to deduct tax at source on such accumulated balance at the time it is paid, as if such withdrawn amount were income chargeable under the head Salaries. However, often, the trustees did not have the requisite information to be in a position to compute the TDS correctly. With a view to simplify the process of deduction in such cases, Section 192A is now inserted to provide that trustees of RPFs shall, at the time of payment of the accumulated balance due to the employee, deduct tax at source at the rate of 10%, where the aggregate withdrawal is Rs. 30,000/- or more.

At the same time, if the concerned employee fails to furnish her/his permanent account number (PAN) to the person responsible for deducting such tax, then tax shall be deducted at the maximum marginal rate as per Section 206AA. It has also been provided that tax shall not be deducted if the employee furnishes to the payer a self-declaration in the prescribed Form No. 15G/15H, declaring that the tax on her/his estimated total income of the relevant previous year would be nil.

All these amendments shall take effect from 1st June 2015.

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