The accumulated balance could not be transferred to a PF account with your new employer as it is not a covered establishment under the PF Act. (Photo: iStock)
The accumulated balance could not be transferred to a PF account with your new employer as it is not a covered establishment under the PF Act. (Photo: iStock)

EPF account becomes inoperative if an employee migrates abroad permanently

  • A PF account becomes inoperative and does not earn further interest, where an employee retires from service
  • The accumulated PF balance due and payable to you is exempt from tax if you have rendered continuous service for a period of five years

I am 52 years old and the company I was with (a South Korean MNC) closed its operation on 31 May 2016. Since then, I haven’t contributed to my Employees’ Provident Fund (EPF) account. A few months later, I joined another company where there’s no EPF. Will my account be inoperative now? Will it accrue any interest since 36 months have gone by without any contribution? If I withdraw the amount, will it be taxable?

—N.K. Misra

It is assumed that you are an Indian citizen. As per the provisions of the Indian PF law, 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.

In your case, your employment ceased 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 account till the age of 58 years.

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 accumulated PF balance due and payable to you, which is the 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 or even if you have not rendered continuous service because the service was terminated by reason of continuance or discontinuance of employer’s business or other reasons beyond the control of the employee.

Accordingly, assuming you have contributed to PF for a continuous period of at least five years before retirement, the accumulated balance to the extent payable to you at the time of ceasing employment is exempt from tax. Even if the service period is less than five years, it can be contended that tax should not be levied on the accumulated PF balance, since your service with the earlier employer has been terminated due to discontinuance or closure of the employer’s business. Also, the accumulated balance could not be transferred to a PF account with your new employer as it is not a covered establishment under the PF Act.

However, any accretions to such balance post cessation of your employment would be taxable in your hands. Taxes on the same may be paid by way of advance tax or self-assessment tax, as applicable. A recent judicial ruling of Bangalore ITAT held that interest earned post cessation of employment shall be considered as taxable in the hands of the individual. Considering, however, that this is a fact-specific case, applicability of the same would need to be evaluated on a case-to-case basis.

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

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