PF withdrawn before 5 years of continuous employment is taxed
The aggregate of employer's contribution to PF and interest earned thereon will be taxable as salary
I have been working with a company for the past four years—this is my first job. However, I am planning to move to another company. Does the Employees’ Provident Fund become taxable if I quit and withdraw the accumulated provident fund (PF) amount. Is there a way to save tax on this type of withdrawal?
—Sameer Motwani
An individual has to pay tax on withdrawal of PF accumulations if the same has been withdrawn from a recognized PF account without rendering continuous services for five years or more with the employer.
On change in employment in the past, if the accumulated PF balance has been transferred to the PF account of the new employer, then the period of previous employment should also be considered as part of continuous service and accordingly, the five years is computed.
Since this is your first job with the current employer and the total period of service with the employer is less than five years (i.e., four years), if you withdraw the PF balance, it shall be taxable in the financial year (FY) of withdrawal.
The aggregate of employer’s contribution to PF and interest earned thereon will be taxable as salary.
Further, to the extent of the deduction claimed by you under section 80C of the Income-tax Act, 1961, on your own contribution to the recognized PF shall be taxed as salary.
Also, the interest earned on your own contribution to PF shall be taxed as “income from other sources”. The tax rate would depend on your applicable income slab in each of the FY(s) during which the PF contributions were made. Further, the surcharge (as applicable) and education cess, shall be applicable, for each of the FYs will also be payable in addition to the basic income tax.
You would be entitled to avail relief under section 89.
Tax will be deducted at source at 10% if the taxable PF amount is more than 30,000 and provided the Permanent Account Number (PAN) of the individual is available. If PAN is not available, then tax would be deducted at maximum marginal rate.
However, if you transfer the accumulated PF balance maintained with the current company to the PF account maintained with new employer upon change in job and later on withdraw the accumulated PF balance, the period of services rendered with current company will also then be included.
The withdrawal has to be as per the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (PF provisions).
If the cumulative years of service with the current and new employer are more than five years, the withdrawal will not trigger tax liability.
The withdrawal of PF will be as per the aforesaid provisions, which requires you to have a non-employment period of two months after leaving your job.
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First Published:24 Jun 2015, 04:48 PM IST
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