How is PF withdrawal taxed in US tax filing?

I want to know whether I can withdraw my Provident Fund (PF) fund in India without any tax or penalty? Also, when I file tax in US now, will I have to show PF amount as income and pay tax on it? If yes, will that tax be only on the interest earned or on the principal also?

-Name withheld on request

If you make withdrawals from Employees’ Provident Fund (EPF) before completing five consecutive years of service, then tax at source (TDS) will be deducted. In the calculation of five years of service, your tenure with the previous employer is also included.

If you transfer your EPF balance from the old employer to the new employer and your total employment is five years or more, then no TDS is deducted. Remember that you must calculate the exact five years, there is no grace if you are less than a few days old.

TDS is deducted at the rate of 10% on EPF balance if withdrawn before five years of service. Don’t forget to mention your PAN at the time of withdrawal. If PAN is not provided then TDS will be deducted at the highest slab rate of 30%.

After Budget 2021, interest on employee’s contribution to the above EPF account 2.5 lakh is taxable in the hands of the employee during the financial year. This interest is also subject to TDS.

This amount may not be taxable in the United States, which will further depend on your residential status and the Double Taxation Avoidance Agreement (DTAA) between these two countries with respect to retirees.

It is recommended that you consult an expert to understand how you will be affected.

Archit Gupta is the founder and CEO of Clear.in.