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Business News/ Money / Calculators/  Tax on PF withdrawal depends on period of continuous holding
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Tax on PF withdrawal depends on period of continuous holding

The withdrawal of the accumulated balance from a recognised PF is taxable if the employee has not rendered continuous services with the employer for five years or more

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I contributed to my provident fund (PF) account for two years and seven months with the previous employer. Now I contribute towards PF in the new organisation. My old PF account is more than seven years old. If I withdraw, what will be the tax implications? Does the tax criteria come into action on completing five years of subscription of PF account or continuous service of five years?

—Harini

The withdrawal of the accumulated balance from a recognised PF is taxable if the employee has not rendered continuous services with the employer for five years or more. While computing the continuous service, the period of previous employment is also included, if the accumulated balance maintained with the old employer is transferred to the PF account of the new employer.

We understand that you have rendered service for two years seven months. Assuming that this was your first job or you have not transferred PF balance, if any, from the previous employer, if you withdraw your PF, it shall be taxable in the year of receipt. Continuing to keep the balance and withdrawing after seven years will not change taxability.

With respect to the tax liability on withdrawal, the total of employer’s contribution plus interest thereon will be taxed as salary. Further, the amount of tax benefit claimed under section 80C (of the income-tax Act) on account of your contribution to the recognised PF shall also be taxed as salary. Also, the interest on your own contribution shall be taxed as income from other sources. Tax rate would depend upon your applicable income slab in each of the financial years during which the PF contributions were made. Further, the surcharge and cess, as applicable, for each of the years will also be payable. In your case, since the PF contribution is spread over different FYs, tax rates of those years would have to be considered.

In case of change of employment where the accumulated PF balance maintained with the old employer (company A) is transferred to the PF account maintained with the new employer (company B) and later on the accumulated PF balance maintained with company B is withdrawn, the period of service of two years and seven months served with the company A will also be counted for five years of continuous services. Since the cumulative years of services would be more than five years, the withdrawal of PF from company B will not be taxed.

If the PF amount withdrawn is more than 30,000 (presuming that your employer maintains PF with a recognised PF) tax will be deducted at source at 10% and you have to provide your Permanent Account Number (PAN). If PAN is not provided, then tax would be deducted at the maximum marginal rate.

Separately, just for your information, the withdrawal of the PF will be as per the PF provisions, which requires you to have a non-employment period of two months after leaving your job.

Queries and views at mintmoney@livemint.com

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Published: 23 Sep 2015, 07:04 PM IST
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