No interest will accrue on your PF corpus when account becomes inoperative

I have one Universal Account Number (UAN) but two Employees’ Provident Fund (EPF) accounts as my company was demerged in 2014 and a new account was opened. The PF department stopped paying interest on the balance in my earlier account after three years. Please guide me if it’s become dormant and I need to pay tax on the balance accumulated. Will I have to pay no tax if I transfer the PF to a single account?

—Rakesh Arora

As per the existing provisions under the Indian Provident Fund (PF) law, a PF account becomes an “inoperative account” and does not earn further interest amount, where an employee retires from service after attaining the age of 55 years or migrates abroad permanently or dies and an application for withdrawal of his accumulated balance is not made within 36 months. Until such time, the interest amount will continue to accrue on the PF corpus. However, no interest amount will accrue once the account becomes inoperative.

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In your case, it is assumed that you have ceased employment with the earlier company (albeit on account of demerger) before completing 55 years of age and no contributions have been made to the said PF account thereafter. Therefore, you should be able to earn interest money in the PF account till the age of 58 years or until the date of withdrawal, whichever is earlier.

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 the employee—balance to his credit on the date of cessation of his employment— is exempt from tax if he has rendered continuous service for a period of five years or more. Where there are multiple employers and the PF balances are transferred to the PF account with the most recent employer, the cumulative period of employment with all the employers is required to be seen for the purpose of evaluating whether the employee has rendered continuous service for a period of five years or more.

In the instant case, if your period of contribution in the PF account with the entity prior to demerger is less than five years, the PF balance up to withdrawal shall be chargeable to tax in accordance with Rule 9 of Part A of Fourth Schedule of the Act. However, in case the balance in the earlier PF account is transferred to the new PF account and the cumulative period of contribution is more than five years, the accumulated balance to the extent payable to the employee at the time of ceasing employment shall be exempt from tax. However, any accretions to such balance, thereafter (after the last day of working with the current employer till the date of withdrawal) will be taxable in your hands.

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