Employees often assume that submitting Form 121, a new declaration under the Income-tax Act, 2025, will automatically exempt their Employees' Provident Fund (EPF) withdrawals from tax. However, this is a common misconception that could lead to unexpected tax liabilities, particularly for those withdrawing funds before completing five years of continuous service.
Form 121 replaces the earlier Forms 15G and 15H, allowing eligible taxpayers to declare a nil estimated tax liability for the year and seek exemption from Tax Deducted at Source (TDS) on certain payments. While it can prevent an upfront deduction, it does not independently determine the taxability of the withdrawal or eliminate final tax obligations. It's crucial for EPF subscribers to assess their individual circumstances before making a withdrawal.
Here are five essential things EPF subscribers should check:
1. Verify Your Continuous Service Period
EPF withdrawals made before completing five years of continuous service are generally taxable, with some exceptions. Before initiating a withdrawal, thoroughly review your service history. Transferring your provident fund balance when changing employers can help maintain service continuity. Certain circumstances beyond an employee's control may also qualify for relief under applicable provisions. The tax treatment and TDS applicability must always be evaluated separately from Form 121.
2. Check the Withdrawal Amount
Under Employees' Provident Fund Organisation (EPFO) rules, TDS typically applies to eligible premature EPF withdrawals exceeding Rs 50,000. If you provide a valid Permanent Account Number (PAN), the TDS rate is generally 10%, subject to specific provisions and exceptions. Always confirm the applicable threshold and deduction requirements before proceeding with a withdrawal, as the amount deducted at source is not necessarily your final tax payable.
3. Estimate Your Total Income
Form 121 is intended for taxpayers whose estimated tax liability for the relevant tax year is nil. Before submitting this declaration, consider all your expected income sources for the year, including salary, interest, and other taxable income. Also, account for any applicable deductions and rebates. It's vital to assess your overall tax position rather than viewing the EPF withdrawal in isolation.
4. Confirm Your Eligibility for Form 121
Not all taxpayers qualify to use Form 121 to avoid TDS. Eligibility depends on prescribed conditions, including your estimated tax liability and other requirements. Ensure you meet all criteria before submitting the declaration to the relevant payer. Filing an ineligible or incorrect declaration will not protect you from potential tax consequences.
5. Understand Your Income-Tax Return Obligations
A declaration that prevents TDS does not automatically exempt the underlying income from taxation. If an EPF withdrawal is taxable under the applicable provisions, you will still need to report it in your income-tax return and pay any tax due. For instance, an employee withdrawing EPF savings after three years of service, even with Form 121, must consider their service history, withdrawal circumstances, and overall tax position to determine the correct tax treatment.
For withdrawals from tax year 2026-27 onwards, eligible taxpayers should use Form 121 instead of the older Forms 15G or 15H. Checking your eligibility and understanding the tax implications beforehand can prevent unnecessary upfront deductions and avoid creating a false expectation of tax exemption.