I worked for a private company for two years where I had a provident fund (PF) account. I then went for higher education and post that I am working with a government-run firm. My current organization provides facility of National Pension System (NPS) rather than PF. My PF account with my previous organization is inactive for more than two years. I am afraid it will not earn interest once it completes three inactive years. Also, if I go for withdrawal, it will be taxable. I do not want to withdraw it or pay tax. I would rather like to keep this money invested and earn interest. Suggest if there is some solution (investing into another PF or Public Provident Fund, or PPF, account, continuing the existing PF account, transfer to my NPS account) or any other way through which it continues to grow.
You are correct and your PF account has become inactive and will not earn any interest after the three year period is over. In the current scenario, your options are limited. You cannot transfer the PF to an NPS account. And continuing the PF is not recommended as you will not be earning any interest. Currently the option to switch from PF to NPS is also not available and tax cannot be avoided.
Hence, the option left is to withdraw. Your PF account will become taxable as you do not satisfy the criteria defined by the Income-tax Act. As per the Act, recognized PF is eligible for exemption from tax only if the employee has rendered continuous service to the employer for five years or more. In case the balance is transferred from the previous employer then the years with previous employer is also included.
In your case, as you have not rendered service for five years and there is a break after the first job, the PF becomes taxable and even if you do not redeem the same and continue holding it, you will be just deferring your tax liability. The tax liability will be on the employer’s contribution and the interest received. Payment received for your own contribution is exempt from tax if it is not claimed as deduction earlier.
And to ensure growth in corpus, you can open a PPF account and invest the proceeds and in case the amount received is more than the maximum permissible amount in PPF (Rs.1 lakh), the same can be invested in the next fiscal. Alternatively you can also invest in NPS.
You can also consider investments in debt mutual funds wherein you can invest in medium- and long-term debt. You can consider equity as an asset class as your investment horizon is long term. If you have a low risk appetite, you can have a low or moderate exposure to equity. But equity helps in providing an inflation-adjusted return if held for long term.
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Surya Bhatia is managing partner, Asset Managers