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Unrecognised provident fund trusts are not bound by rules of the EPFO

These PF trusts are usually just a tool for accumulating funds. They may have their own set of terms and conditions

I left my last company 3 months before completing 5 years of service. I am yet to join elsewhere. I am told that I have a window of 3 months; after which the provident fund office would automatically close my account and refund the money after deducting 30%. My former company does not deposit money in the Employees’ Provident Fund Organisation (EPFO) but in a fund handled by chartered accountant. Had it been with EPFO, would the same rules apply? 

—Name withheld on request

Provident fund (PF) withdrawal is taxable if an employee resigns before completing 5 years of continuous service. This period includes previous employments if the PF has been transferred from any previous employer to the new employer.

PF has four components—employer’s contribution, interest on employer’s contribution, employee’s contribution and interest on it. Depending on whether it is a recognised PF (RPF) or an unrecognised PF (URPF), the tax treatment differs.

In case of an RPF: The employers’s contribution up to 12% of the salary is not taxable; interest credited up to 9.5% is not taxable; and the amount if withdrawn after 5 years of continuous service, is not taxable. The employee’s contribution is eligible for deduction under section 80C (of the income-tax Act); the interest on it is not taxable; and upon withdrawal after 5 years of continuous service, the amount is fully exempt.

In case of URPF: The employer’s contribution is not taxable, and interest credited is not taxable. The employee’s contribution is not eligible for any tax deduction but the interest on it is not taxable. On withdrawal, however, employer’s contribution and the interest on that is taxed as salary. Interest on employee’s contribution is taxed as ‘income from other sources’.

Tax deducted at source (TDS) applies on the withdrawal amount if it exceeds Rs50,000. If Permanent Account Number (PAN) is available, TDS rate is 10%, else TDS is at the maximum marginal rate. If you leave your PF account open but there are no further contributions, you continue to earn interest on it.

From the details you have given, it seems like your employer has an unrecognised provident fund. These PFs are usually just a tool for accumulating funds and are not really covered under rules of EPF. They may have their own terms and conditions. You may want to look at withdrawing your PF in such a scenario.

I am 23 years old and have started working in a public sector undertaking. My contribution towards the National Pension System (NPS) is about Rs3,400, same as my employer (total: Rs6,800). What will be my NPS balance after retirement (age 60)?

—Ankush Mangla

The final corpus will depend on three components: contribution, rate of return, and time. The contribution to NPS will change over the years based on your salary. Since NPS is not a guaranteed-return product, the return is not known upfront. It will depend on the performance of the underlying assets. The 5-year return figures in the state and the central government plans have been 10.5-10.76%.

The tax structure of NPS may undergo changes over time. But as per current rules, one needs to buy annuity of minimum 40% of the accumulated corpus in NPS; and 40% can be withdrawn as tax-free lump sum. The rest 20% can be withdrawn as lump sum but will be taxed at your marginal tax rate. 

You can increase your component to buy annuity by adding this 20%, which will then not be taxed. The annuity received will form a part of your total income and will be taxed as per your tax slab. 

While you are investing you get tax benefits as follows:

Employee contribution: Eligible for tax deduction under section 80CCD(1) up to 10% of salary (basic+dearness allowance) within the overall ceiling of Rs1.5 lakh under section 80CCE.

Employer contribution: Up to 10% of salary (basic plus DA) with no ceiling under section 80CCD(2). This rebate is over and above the overall ceiling of Rs1.5 lakh under section 80 CCE. You are also eligible to contribute and claim deduction for Rs50,000 per year under Section 80CCD(1B).

You can defer payout of annuity for a period of 3 years and the deferment of lump sum withdrawal is allowed till the age of 70 years.

Kiran Telang is co-founder and director of Dhanayush Capital Advisors Pvt.Ltd.

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