EPF withdrawal before 5 years

The rebate u/s 89 is basically to even out the tax liability across the years by allocating the arrears received now to the years they pertain to. Thus in your case, the amount received now is for the financial years 2010-11 to 2014-15. The amount will be allocated for each financial year 2010-11 to 2014-15. Then the tax liability for each year will be calculated by adding this income to the returned / assessed income for these years. The difference between the tax liability for the assessment year 2015-16 by including arrears and the tax liability for the assessment years 2011-12 to 2015-16 by spreading out the arrears will be allowed as rebate u/s 89. The effect of this rebate is to even out any difference in tax liability due to changes in income slabs.

The workings for the rebate u/s 89 are complicated. I suggest that you should do it with the help of a CA by using a standard software to avoid errors.

Section 89 of the Income Tax Act,1961 deals with relief when salary is paid in arrears or in advance.

Withdrawal of Provident Fund may attract Income Tax. The Income Tax Department recently held that the EPFO Office shall deduct Tax (TDS) from the withdrawal amount, if the withdrawal happened before completing five years of subscription. Tax officials have cited a rule in the 1961 Income-Tax Act that taxes PF withdrawals by employees before completing five years of contributions into the EPF is taxable.

For conclusion , where the PF amount is withdrawn before five years of continuous service, it may be taxable in the hands of the individual as if the fund was not recognised from the start of the contributions. In such a case, payment received by the individual in respect of the employer’s contribution along with the interest accrual thereon is taxed as “salary”. Interest on the employee’s contribution is taxable as “other income”. Payment received in respect of the employee’s own contribution is exempt from tax (to the extent not claimed as a deduction earlier).

The last line means that the amount you have not claimed in sec.80C will be exempt.

Under Section 80C , you can claim the contribution by employees to PF.

Yes, this will be treated as salary

If the withdrawal cannot be related to specific year then 1/3rd amount should be added to current year income and other two 1/3rd s amount should be added to two earlier years Income and tax should be calculated on the basis of accrual and then tax on receipt basis and difference between receipt basis and accrual basis is a positive figure then same can be claimed as deduction u/s 89 from the tax payable.

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The computation of total income will be same except for the addition of income due to the income attributable to the respective assessment years.

Dear Sir,

Calculation of Working u/s 89 is complicated and so is implementing it while filing your Income Tax Returns.

It is good to see that you are keen in understanding the provisions but it is in your own interest to take a CA's advice in your city to ease out your job in filing your laws by following the rightful compliance and avoid further complications which may arise.

Thanking You.

Regards,

CA Rohit R Sharma

Your proposition is right to calculate the relief u/s 89.