I am retiring by the end of this year. I won’t need my provident fund (PF) corpus immediately. If I withdraw it after, say, two or three years, will the corpus become taxable? Also, how is gratuity payout taxed? Will the rules for taxation of gratuity change if I withdraw that after some years?
On the question of PF withdrawal, from a tax perspective, as per Section 10(12) read with Rule 8 of Part A of Fourth Schedule of the Income-tax Act, 1961 (the Act), 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.
If the period of employment is more than five years, the accumulated balance to the extent payable to you at the time and up to the ceasing your employment shall be exempt from tax. However, any accretions to such balance thereafter—from the date of your ceasing employment till the date of withdrawal—would be taxable in your hands.
On the gratuity payout query, we have assumed that the establishment with which you are employed is covered under the Payment of Gratuity Act, 1972.
The exemption that can be claimed shall be the lowest of the following three amounts: (i) 15 days’ salary wages based on the rate of salary wages last drawn multiplied by completed years of service; (ii) actual amount of gratuity paid; (iii) ₹20 lakh; it may be noted that if any gratuity exemption was claimed earlier by the assessee, this limit would be reduced to that extent.
The applicable rules for taxation of gratuity, if you receive the payment after two or three years, shall be as per the provisions of the tax law pertaining to the financial year in which you receive the gratuity.
The manner of calculation of the tax exemption at the time of retirement from employment should prevail unless the provisions of the law undergo a change subsequently. Also, the tax slabs and rates prevailing in the year of payment would apply to any taxable income. The company should separately examine the consequences of the delayed payment of gratuity under the Payment of Gratuity Act.
However, it is generally observed that if eligible, gratuity is paid out along with full and final settlement and not at a later point in time.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at email@example.com