EPF Transfer vs. Withdrawal - Rules and Benefits

Employee Provident Fund or EPF is the only investment instrument in India which enjoys EEE advantage. 

EEE is acronym for exempt from tax during deposit, exempt during interest accumulation and exempt from tax during withdrawal on the corpus after retirement or specified period.

EPF is commonly seen as retirement fund which is accumulated and compounded at a very high interest rate for the tenure of your employment. The benefits of EPF is only visible when it is left for accumulation for 30 - 35 years. 

For instance just Rs. 3000 invested in your EPF account every month for 35 years (assuming you stay employed and received salary for 35 years) becomes Rs. 78 Lakhs at the time of your retirement, assuming the government provides 9% interest rate on EPF fund. Now this huge corpus can be used after your retirement for all your need when your regular income stops. Thus it is always advisable not to withdraw EPF fund before retirement but rather transfer it when your employer is changed. Beside this there are couple of more reasons why you should choose to transfer the funds from your EPF account instead of withdrawing it when you switch companies.

Legality: You can apply for withdrawing EPF only if you are not employed for two months after leaving the previous job. So, if you take up a new job in this period, the law requires you to transfer the EPF balance. This is because the EPF is meant to contribute to your retirement corpus.

Tax on withdrawal before 5 years: If you withdraw your EPF balance before completing five years of service, whether with the same employer or with different employers, you stand to pay much on taxes. In such cases, you will have to pay tax on the employer's contributions to the EPF during the earlier years. Tax benefits claimed earlier on your own contributions will also be lost.Besides, you will have to pay tax on the interest earned on both your and the employer's contribution to the EPF. All this can erode your returns.

For further details on transfer or withdrawal process check out the following link: EPF Transfer / Withdrawal