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EPF Withdrawal - Taxable or Exempt?

A contribution towards an EPF account provides a benefit to individuals by way of a deduction under Section 80 C (see here). It would also be good to know what would be the income tax implications of EPF withdrawal. Interestingly, EPF withdrawal is taxable under certain circumstances and exempt under the certain circumstances.

The following table will help you easily understand the taxability on withdrawal of EPF:

Sl No Scenario Taxability
1 Amount withdrawn is < Rs 50,000 before completion of 5 continuous years of service No TDS. However, If the individual falls under the taxable bracket, he has to offer such EPF withdrawal in his return of income
2 Amount withdrawn is > Rs 50,000 before completion of 5 years of continuous service TDS @ 10% if PAN is furnished; No TDS in case Form 15G/15H is furnished
3 Withdrawal of EPF after 5 years of continuous service No TDS. Further, the individual need not offer the same in the return of income as such withdrawal is exempt from tax
4 Transfer of PF from one account to another upon a change of job No TDS. Further, the individual need not offer the same in return of income as it is not taxable.
5 Before completion of 5 continuous years of service\ if employment is terminated

due to the employee’s ill health. The business of the employer is discontinued or the reasons for withdrawal are beyond the employee’s control

No TDS. Further, the individual need not offer the same in the return of income as such withdrawal is exempt from tax
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How to calculate Pension under EPS

We have discussed everything about EPS in our series of Articles on EPS.

You can read them

http://www.wealthcafe.in/basics-of-employee-pension-scheme-eps/

http://www.wealthcafe.in/forms-of-eps/

http://www.wealthcafe.in/is-the-monthly-pension-paid-under-eps-just/

Monthly pension calculation (Employed after 16/11/1995)

The pension amount for those employed after 16th November 1995 is calculated as follows:

Pension amount = (Pensionable salary * Service period)/70

In order to calculate the monthly pension, in this case, the following points need to be kept in mind:

  • Pensionable salary is the average income of the preceding 60 months. Most employers have a restriction on pension contribution to either Rs.1,250 or 8.33%, whichever is minimum. In these scenarios, the maximum pensionable salary would be Rs.15,000.
  • Only the basic pay and dearness allowance are considered a salary.
  • If an employee has completed over 20 years of service, then two years should be added as a bonus in the equation. According to the rules, the bonus can be also applied for the service before 16/11/1995.
  • The new rules make it mandatory for the pension to be more than Rs.1,000 per month.
  • An employee is eligible for a pension after completion of 10 years of service.

2.      Monthly Pension Calculation for a member who joined EPF before 15.11.1995 have 3 components in the Pension calculation

a) Procedure for calculating the Past Service Pension

  • The pension is calculated twice based on the period of employment.
  • Once before 16/11/1995 and once after 16/11/1995.
  • For calculation of pension before 16/11/1995, the following table can be used. In this table, the pension is fixed based on the pay and period of service.
Years of past service Up to Rs.2,500 (Salary) Above Rs.2,500 (Salary)
Below 11 years 80 85
Between 11 to 15 years 95 105
Between 15 to 20 years 120 135
More than 20 years 150 170
  • Find out the period that had elapsed between 16.11.1995 and the date of exit and based on this period locates the corresponding Table ‘B’ Factor. Date of Exit is Date of attaining 58 years for superannuation/early pension, Date of Death for widow pension and Date of Disablement for Disablement Pension.
  • Multiply the Past Service Benefit and the Table B factor, which gives the Past.

b) Procedure for calculation of Pensionable Service Pension

  • Find out the Category of the member as to whether he belongs to X, Y or Z Category.
  • X – Date of commencement of pension is between 16.11.1995 and 15.11.2000 Y – Date of commencement of pension is between 16.11.2000 and 15.11.2005 Z – Date of commencement of pension on or after 16.11.2005.
  • Find out the Pensionable Service and Pensionable Salary of the member and substitute the same in the formula given as below.

(Average Salary X Service)/70

  • If the formula pension calculated is less than 335/438/635 respectively, for X, Y, Z categories, then only that minimum pension is to be given.

c) Procedure for the calculation of Total Pension-Add the Past Service Pension and the Formula Pension.

  • Add the Past Service Pension and the Formula Pension.
  • If the total pension is less than 500/600/800 respectively, for X, Y, Z categories, then that minimum pension shall be the total pension.
  • But this total pension is for an eligible service of 24 years or more, and if the eligible service is less than 24 years, then this total pension has to be proportionately reduced subject to a minimum of 265/325/450 depending on X, Y, Z categories (only when the minimum pension is given).
  • If the total pension itself is more than the minimum, then the proportionate reduction need not be made even if the eligible service is less than 24 years.

Wealth Cafe Tip - We tend to accept EPF the way it is displayed in our passbooks. There is always a scope of error and one should verify every return and investment they are making.

Is the monthly pension paid under EPS just?

The government has fixed the monthly pension benefit at 1,000 INR from the financial year 2014-15. Those who started job after 1 Sep 2014 and earning more than 15,000  INR in basic and DA will not be contributing to the Pension Scheme. Before Sep 1, 2014, it was Based on a maximum employment period of 35 years, and a maximum contribution of Rs 6500, the maximum amount of pension as per the Pension formula would be = 6500 * 35)/70 = Rs 3,250 per month or  Rs. 39,000(3250 * 12) per year. Our article How to calculate your pension under EPS will explain the same in detail

  • Maximum Pension one can get is 7,500 INR per month.
  • Minimum Pension one can get is 1,000 INR per month.

Is the Monthly Pension paid under EPS just?

The amount of pension is meager. If one would have invested 541 INR in a Debt Mutual Fund at the rate of 8% for 35 years one would get 12,49,263 as maturity amount. If this maturity amount is put in buying the Pension plan and put the above amount 12,49,263 INR in the premium calculator of LIC with an option as Annuity payable for life, one would get a monthly pension of 10,150 INR which is much more than 3250 INR.

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UAN - Universal Account Number - Things to note

What is UAN?

The UAN or the Universal Account number is a 12 digit unique number allotted to each member of the Employee Provident Fund (EPF) which helps them to manage their EPF account.

The UAN will be associated with an employee and will connect all his PF (Provident Fund) accounts across organizations.

This number is issued by the Ministry of Labor and Employment, Government of India.

If an individual changes his job, he will get a new PF account with the organization. This way, multiple PF account numbers will be allotted to an employee. Multiple PF account numbers is an area of concern as many employees report grievances related to transfer and withdrawal of PF amount. To counter this problem and to make the management of provident fund accounts easier, the concept of UAN was introduced The UAN is a single account number that will connect the multiple IDs associated with an employer. With UAN, an employee can connect all his EPFO accounts to make the process of PF withdrawal and transfer easier.

Advantages of UAN

Once you have the UAN number and you register it then you can check many details. Benefit Of Registration of UAN  at UAN Member e-Sewa Portal are as follows:

  • You can download the updated EPF passbook. The passbook will tell you the EPF balance broken into Employee Contribution(EE) and Employer Contribution (ER). Also deduction for Employee Pension Scheme (EPS). Sample passbook is shown below.
  • You can link your previous PF accounts (before Oct 2014) which are not linked to UAN number.
  • All you have to do to bring your PF accounts together is give your UAN to current employer. After KYC verification, you will be able to view and manage all accounts.
  • You will get notifications on your mobile every time your employer makes a monthly deposit in your PF account.
  • You will know about all the movements in your PF account and thus, your employer cannot dominate the same anymore.
  • You can verify your transfer claims on EPFO web portal by mentioning your UAN.
  • You can change the mobile number and email address.

Read about the step by step process of opening your UAN account in the next article.

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Basics of Employee Pension Scheme (EPS)

We have discussed the basic contributions of EPF and how the money is invested, contributed and received by the employees. There is a component called EPS (employee pension scheme) and as per the law, a fixed amount or % of the employer’s contribution goes towards EPS which works as a retirement pension corpus for the employees.

While reading about EPF, I realized that EPS is more detailed than I had imagined and it has implications on the financial decisions of each employee. At the outset, it is a very good scheme, each month 8.33% of the basic pay is contributed towards EPS and on retirement, one gets the money back as a pension. Thus, the EPS part of your EPF works like an annuity plan.

Employees’ Pension Scheme (EPS)

  • Employees are automatically enrolled in the EPS Scheme only if they are members of the EPF scheme.
  • EPS is financed by diverting 8.33% of employer’s monthly contribution from the EPF. Monthly contribution to EPS is restricted to 8.33% of Rs. 15,000 i.e. Rs. 1250.
  • Unlike the EPF contribution EPS, the part does NOT get any interest.
  • The fraction of service for six months or more shall be treated as one year and the service less than six months shall be ignored. So 9 years and 6 months will be rounded up to 10 years.
  • The lifelong pension is available to the member and upon his death members of the family are entitled for the balance pension.
  • Pension received is lifelong and passes on to spouse and two children upon the employee’s death
  • Employees can receive only pension from EPS and are eligible only after completion of 10 years of service and must have attained the age of 50 years for early pension and 58 years for regular pension
  • No pension is payable before the age of 50 years.
  • The maximum Pension per month is subject to a maximum of Rs 3,250 per month.
  • Maximum service for the calculation of service is 35 years.
  • No pensioner can receive more than one EPF Pension.

When can Employee Avail the Pension

Unlike EPF, EPS cannot be withdrawn at any point of career. There are only specific cases where the same will be receivable:

  • Through Superannuation, where he/she has completed 10 years of service and is above 58 years and can continue to work. No fresh EPF will be made in his/her name.
  • Early pension, when completed 10 years of service, between 50 to 58 years and is not working anymore.
  • Unfit to perform the job or permanent disability

Transfer of EPS on Transfer of EPF from one company to another. 

  • When the employee switches jobs, the EPF gets transferred to the new employer, but not the EPS.
  • When the employee switches jobs, the EPS amount or carries it forward to the next job. This, however, depends on the length of his service and his age.
  • If EPF gets transferred the EPS also gets transferred. However, the UAN passbook shows amount as 0.
  • While transferring PF from one establishment to another, the service details, information (like the length of service, non-contributory period, last wages drawn are furnished to the receiving PF office in Annexure K which will be used to calculate the pension benefits. AMOUNT IN PENSION FUND IS NOT REQ”.

Claiming Pension Money

  • If you have scheme certificate of pension

Once the employee crosses the age of 50, he or she is entitled to get pension by Scheme Certificate. The employee is required to fill Form 10-D to avail regular pension. If the employee has more than one Scheme Certificate, he or she can directly go to the EPF office. This requires attestation of the employee’s Form 10-D by the bank manager.

  • If you don’t have scheme certificate of pension

In case an employee has not completed 9.5 years of service, you must claim a pension refund. In order to do, you have to fill Form 10-C along with EPF Withdrawal form and submit it through your employer.

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Forms of EPS

There are various forms that need to be submitted to avail different benefits under Employee Pension Scheme. They are:

Form name Filled by Benefit
Form 10C Beneficiary or member ·        Withdrawal benefit

·        Scheme Certificate

Form 10D Member ·        To avail pension after 58 years of age

·        To avail pension before 58 years but after turning 50

·        To avail disability pension

Form 10D Nominee or widow/widower or Children ·        To avail nominee or dependant pension

·        To avail family pension

·        To avail children or orphan pension

Life Certificate Pensioner ·        To be submitted by pension beneficiary or children every November

·        To be submitted to the manager of the pension disbursing banks

Non-remarriage Certificate Widower/widow ·           To be submitted by widower every year

·           To be submitted by the widow at the beginning of pension

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