Many employees withdraw their EPF (Employee Provident Fund) when switching jobs or during emergencies. However, very few know that withdrawing PF before completing five years of service can make it taxable. Although EPF is generally considered a tax-free investment, there are specific conditions that determine when the amount remains tax-free and when it doesn’t. Let’s understand this in simple terms.

Why EPF Is Considered a Tax-Free Investment

EPF falls under the EEE (Exempt-Exempt-Exempt) category. This means:

1. The money you deposit is exempt from tax,

2. The interest earned on that amount is also tax-free, and

3. The entire maturity amount remains tax-free, provided the contribution continues for at least five years.

Under the old tax regime, employee contributions to EPF are eligible for a deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. However, under the new tax regime, this deduction is not available—only the employer’s contribution gets certain benefits.

When Can You Withdraw EPF?

Full withdrawal from your EPF account is allowed only under specific situations:

• On retirement at the age of 55.

• On permanent resignation due to illness, relocation abroad, or company closure.

• After voluntary retirement or retrenchment.

• Or if you remain unemployed for at least two months.

In these cases, you can withdraw your entire EPF balance.

How Is EPF Withdrawal Taxed Before 5 Years?

If you withdraw EPF funds before completing five years of continuous service, TDS (Tax Deducted at Source) will be applied.

• If you’ve provided your PAN, the TDS rate is 10%.

• If you haven’t provided PAN, the rate increases to about 34.6%.

However, no TDS is deducted in certain cases — for example:

• When the PF balance is transferred from one employer to another.

• When employment ends due to illness, company closure, or other unavoidable reasons beyond your control.

How the “5-Year Service” Is Calculated

The five-year period isn’t limited to working in one company. If you’ve changed jobs and transferred your PF balance, the total years from your previous and current employment are added together.
So, if your total service (with transfers) exceeds five years, your PF withdrawal will not be taxable.

Also, if your employment was interrupted because of illness, an accident, or a legal strike, that break is still considered part of your continuous service.