Tax-free withdrawal limit for PF may rise to 2 Lakh

The Labour Ministry has sought a fourfold increase in the threshold limit for tax deduction on provident fund withdrawals, from the existing ₹50,000 to ₹2 lakh, in the coming Budget.

This means that if the proposal gets a go-ahead, you may be able to withdraw provident fund savings of up to ₹2 lakh without any tax deduction even if you have not completed five years of continuous service.

At present, provident fund withdrawals of more than ₹50,000 before completing five years in service attracts income tax of up to 34.608%.

“No tax is required to be deducted on provident fund withdrawal of less than ₹50,000. However, even this limit appears to be too low and may be enhanced to ₹2 lakh keeping in view the deliberations in the meetings of the Central Board of Trustees,” the Employees’ Provident Fund Organisation (EPFO) wrote in a recent letter to the Labour Ministry, which has since been forwarded to the Finance Ministry for inclusion in the Union Budget for 2017-18.

The Centre had last year increased the threshold limit of PF withdrawal for deduction of tax (TDS) from ₹30,000 to ₹50,000.

PAN card

The Labour Ministry has also requested the Finance Ministry to remove tax deduction of 34.608%, known as the maximum marginal rate, for workers who do not furnish PAN card details.

While a 10% tax is deducted for workers disclosing PAN details, 34.608% tax is deducted for workers who do not have a PAN card.

“It would not be out of place to mention that only such persons are required to have a PAN who are above the taxable limit,” the EPFO wrote. “The total revenue impact on this count would be less than ₹10 crore,” according to the EPFO.

“Guaranteed service of five years in the lifetime of an employee is not available under either Central of State legislations. The said provision may be amended to incorporate five years of (PF) deposits from the first month of contribution.”

The Finance Act of 2015 had first introduced the deduction of income tax on payment of accumulated provident fund balance due to an employee with less than five years of service.

Service tax exemption

The Labour Ministry has also sought retrospective service tax exemption for the EPF scheme.

EPFO was exempted from the purview of service tax from April 2016.

The Labour Ministry has now said the exemption should come into effect retrospectively arguing that EPF is a social security scheme and doesn’t come in the category of ‘banking and financial services.’

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