TDS on Provident Fund withdrawal
Withdrawing provident fund balances prematurely could become an expensive proposition. The Income Tax department has asked the 3,70,000 crore Employees' Provident Fund Organisation (EPFO) to tax all withdrawals by workers with less than five years of PF savings.
All long-term savings instruments that grant tax benefits to investors, come with a lock-in period – be it public provident fund, infrastructure bonds or equity-linked savings schemes.
Though tax laws also spell out a five-year lock-in period for PF savings, the EPFO has never levied any tax on withdrawals before this period. The organisation recently found that over 70% of its members pull out their PF savings before completing three years of continuous service and PF contributions.
At a meeting with the tax department on Monday, the EPFO contested their diktat to deduct tax at source in such withdrawal cases.
The issue could snowball into another battle between the finance and labour ministries, which have argued extensively over the 9.5% PF rate for 2010-11 and equity investments.
"We have pointed out that the statutory salary limit for EPF coverage is Rs 6,500 per month (or Rs 78,000 a year)," a PF department official told ET. "We can't tax savings of individuals that don't even come under the taxable income bracket," he said.
Budget 2011-12 has raised the tax-free income limit to Rs 180,000. The EPFO is also learnt to have stressed that the taxation provisions put the onus of deducting the tax on employers.
Incidentally, employers who run their own PF trusts already deduct tax for premature withdrawals by workers. Inspection reports of these trusts, which are regulated by EPFO, often advise them against deducting tax at source.
"The tax computation is very complex as it requires all past tax breaks to be reversed and interest income to be added to the amount," said a senior official with a firm that advises company-run PF trusts.
Source: Economic Times
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