Photo: iStock
Photo: iStock

Not contributing to PF for 36 months makes account inoperative for the retired

If you contribute to PF for 5 years continuously before retirement, the accumulated corpus is exempt

I retired at 58 on 31 January 2016 from a company which has its own exempted PF trust. I have not withdrawn my PF assuming that interest will accrue till I decide to withdraw and also that it is not taxable. Recently, I came across that the interest will accrue only for three years after retirement and that interest is taxable after retirement. Please clarify.

—S. Muralidharan

As per the current provisions, for any member who has retired after attaining the age of 55 years, the Provident Fund (PF) account would become inoperative after non-contribution into the account for 36 months. Until such time, interest will continue to accrue on the PF balance. In your case, as you have retired at 58 years of age on 31 January 2016, your account would continue to earn interest up to 36 months from the last contribution made.

As per Section 10(12) read with Rule 8 of Part A of the Fourth Schedule of the Income-tax Act, 1961, the accumulated PF balance due and payable to you—balance to your credit on the date of cessation of your employment—is exempt from tax if you have rendered continuous service for a period of five years or more. 

Assuming that you have contributed to PF for a continuous period of at least five years before retirement, the accumulated balance to the extent payable to you at the time of retirement, is exempt from tax. However, any accretions to such balance thereafter, would be taxable in your hands as income from other sources. 

A recent judicial ruling of Bangalore ITAT has also held that interest earned post cessation of employment shall be considered as taxable in the hands of the individual. Considering however that this is a fact specific case, applicability of the same would need to be evaluated on a case to case basis.

My wife and I are co-owners of an apartment and both of us have contributed towards it. The property is registered in both our names. By a gift deed on a plain paper, I, as donor, have made a gift of my full share of investment to my wife. The entire rental income from the property is reflected in her IT returns. Since I have made a gift deed as mentioned above, am I also required to declare the rental income in my IT returns (proportionate to the investment)? Is it necessary to notarise a gift deed? 

—Subramanian

The rental income arising to your wife, out of the share of property gifted by you to your wife, shall be clubbed as taxable income in your hands and not your wife’s hands. However, income generated from any further investments made by your wife from such rental income, need not be clubbed with your taxable income and would be taxable in her hands.

As the gift is being made by a specified relative, the transaction of gift itself will not give rise to any tax implications in either your or your wife’s hands.

Generally, gift of an immovable property can be effected by a registered gift deed along with payment of applicable stamp duty, depending upon the state in which the property is situated. However, you should seek legal opinion on the appropriate documentation and stamp duty implications for the same. 

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at mintmoney@livemint.com

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