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PF account gets interest upto 36 months with no contribution

Thereafter, the account will be termed as dormant and no interest will be paid.

I joined a company that does not have provident fund (PF) for its employees. What happens to the PF balance from my previous organization? How will the five years of continuous services be calculated?

—Jayanth

As per domestic tax laws, accumulated balance withdrawn from a recognized PF account becomes taxable if it’s withdrawn without rendering continuous service for five years or more. While calculating continuous service, upon change in employment in the past, if the PF balance has been transferred to the PF account of the new employer, then the period of previous employment is also considered as part of continuous service.

You have joined a company where PF provisions are not applicable and you are unable to transfer the existing accumulated PF balance. In such a situation, you can withdraw the accumulated PF balance, according to the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, which requires you to have a cooling period of two months after leaving your job.

Further, taxability on withdrawal of accumulated PF would depend on whether total continuous services of five years has been rendered. If you meet this criteria (including services rendered with past employers, provided the accumulated PF balance was transferred), there would be no tax implications on withdrawal. But you would be required to report the amount withdrawn in your personal income tax return form to be compliant from a disclosure perspective.

If total continuous service is for less than five years, there would be tax on withdrawal. The aggregate of employer’s contribution to PF and interest earned thereon is taxable as salary. Further, to the extent of the deduction claimed under section 80C on your contribution to a recognized PF shall be taxed as salary. The interest earned on your own contribution to PF shall be taxed as “income from other sources". Tax rate would depend on applicable income slab in each of the FY(s) during which the PF contributions were made. Surcharge and education cess will be applicable for each of the FYs. You would be entitled to avail relief under section 89 of income-tax Act.

If you retain the PF balance with the previous company without further contributions, you will continue to earn interest up to 36 months. Thereafter, the account will be termed as dormant and no interest will be paid. In such a scenario, on further change in employment, if you are employed with a company that maintains PF account, then your earlier accumulated PF balance can be transferred to the PF with the new employer. So, while computing period of continuous services with the new employer, period of service with the previous company could also be included. Since there is no specific provision in this respect, and the law states “employment with any other employer", one may take this view.

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