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Hand putting Coins in glass jar with retro alarm clock (istockphoto)

TDS not levied on PF withdrawal if you work for five continuous years

As one renders continuous service for a period of five years or more, there should be no TDS

I worked in Company A for 12 years and then moved to Company B and worked for 2.5 years. There was a gap of one month between the two. Thereafter, I stopped working. Company A had deposited my Employees’ Provident Fund (EPF) contributions in a PF account, while Company B opened a different account for PF. Four months after leaving Company B, I transferred Company A’s PF account to Company B’s PF account. My status is non-salaried ever since I left Company B. I have following questions: 1) will the tax treatment for the two corpuses (at Company A and B) be different if I withdraw the entire amount today? 2) will Company B corpus attract tax deducted at source (TDS)? 3) will Company B corpus be taxable on withdrawal? 4) if not taxable, do I have to declare these corpuses in my tax returns? 5) If I do not withdraw the corpus and let it remain in the merged account, will it continue to get interest; If yes, then for how long?

—Ravi

It is assumed that you have ceased employment before completing the age of 55, and you have not migrated abroad permanently.

Queries 1, 2 and 3: The accumulated PF balance due and payable to the employee (the balance to his credit on the date of cessation of 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 is seen. Since the cumulative period of employment is more than five years, the accumulated balance to the extent payable to you post ceasing employment with employer B shall be exempt.

It may also be noted that for the period that you were on a break from employment, you would not be considered as an employee of any organization and, hence, any accretions in the accumulated PF balance due to you during this period would also be taxable in your hands. Tax on the same should be paid through the prescribed advance tax instalments (if applicable) and/or self- assessment tax prior to filing of the tax return.

As you have rendered continuous service for a period of five years or more, there should be no TDS, while crediting these amounts to you/or at the time of withdrawal made immediately post cessation of employment with employer B.

Query 4: From a disclosure perspective, the portion of the PF withdrawal, which is exempt from tax (accumulated balance until the last working day, excluding the interest (a) pertaining to one month’s gap between employment and (b) accretions post the last day of working with employer B) is required to be disclosed under Schedule EI (exempt income) of the tax return form. The taxable interest and details of tax deposited on the same would need to be included in the relevant schedules in the tax return form.

Whether there is any TDS or not on such income will depend upon the position adopted by the payor, quantum of interest and so on. You may be required to pay advance tax on this income, depending on factors like quantum of overall income (including this income) and tax liability, TDS withheld and age of the tax payer, among others.

From the timing of taxation perspective, for the taxable interest on employer contribution post completion of your employment, it may be contended that the same should be offered to tax on a year-on-year basis. For the taxable interest on employee contribution, the same may be offered to tax based on the method of accounting adopted by the taxpayer, cash or mercantile. The disclosures in the tax returns would need to be made accordingly.

Query 5: As per the existing provisions, a PF account becomes inoperative and does not earn further interest, where an employee retires from service after attaining the age of 55 years or migrates abroad permanently or dies and does not apply for withdrawal of his accumulated balance within 36 months. Until such time, interest will continue to accrue on the PF balances, but no interest will accrue, once the account becomes inoperative. In your case, it is assumed that you ceased employment before completing 55 years of age and no contributions have been made to the PF account thereafter. Therefore, you should be able to earn interest in the PF account till the age of 58 years or until the date of withdrawal, whichever is earlier.

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

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