I-T dept seeks to tax premature PF withdrawals

Employees who wish to withdraw the amount in their Provident Fund accounts prematurely may now have to think twice, as an increasingly hungry and aggressive income tax department is seeking to tax such withdrawals.

The department has asked the Employees' Provident Fund Organisation (EPFO), with Rs3,70,000 crore in its management, to tax all withdrawals by workers with less than five years of PF savings. 

All savings instruments that grant tax benefits to investors come with a lock-in period --- be it a public provident fund (PPF) account, infrastructure bonds, or equity-linked savings schemes. 

However, though tax laws spell out a five-year lock-in period for PF savings, the EPFO has never levied a tax on early withdrawals. The organisation recently found that over 70 per cent of its members pull out their PF savings before completing three years of continuous service and PF contributions. 

Nonetheless, the EPFO is not willing to give in to the taxman's demands. At a meeting with the tax department on Monday, the EPFO reportedly contested the diktat to deduct tax at source in such cases. 

"We have pointed out that the statutory salary limit for EPF coverage is Rs6,500 per month (or Rs78,000 a year)," a PF department official told The Economic Times. "We can't tax savings of individuals who don't even come under the taxable income bracket."