The Employee’s Provident Fund (EPF) scheme aims to enable salaried individuals to build a corpus for their retirement. The employee’s contribution in the EPF account provides tax benefit under Section 80C up to Rs 1.5 lakh. Also, the interest received from a recognised EPF account on retirement is tax-free. However, the investor can withdraw money for other reasons, such as medical emergencies, construction or purchase of the new house, repayment of home loan, wedding, etc.
If the investor withdraws after five years of service, the lump-sum amount received is tax-free. It means that no tax is required to pay for such lump-sum withdrawals. However, one should report such income as exempt in the income tax return.
The income tax department specifically asks for the details of exempt income in the ITR forms. It is important to disclose your source of income in your income tax return. For instance, if you have entered into a high-value transaction using the exempt income in the future, your Form 26AS statement may reflect such transactions. Based on such information, the income tax department may ask you the source of income for such a transaction. In such situations, you will not explain the source of income, and the income tax department may penalise you for non-disclosure of income.
For example, you have received a lump-sum amount on retirement from EPF. You have invested a sum of Rs 20 lakh for the purchase of land or property. You may be required to furnish your permanent account number to register the property in your name. The registration authority will report these transactions to the income tax department.
On suspicion, the income tax department may issue a notice to justify your income source. If you have reported the exempt income in your ITR, the income tax department will consider it valid proof and not impose any penalty. However, if you don’t report the exempt income, you have to face the consequences for the same.
Therefore, to avoid unforeseeable situations, a taxpayer should declare all exempt income in his income tax return for the financial year.
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