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How is interest accrued on PF taxed?

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  • As per the provisions of the Income-tax (I-T) Act 1961, the accumulated balance due and becoming payable to an employee participating in a recognized provident fund is exempt in the hands of the employee to the extent provided in rule 8 of Part A of the fourth schedule

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My provident fund (PF) account is more than five years old and my contribution to the fund is less than 2.5 lakh per annum. If I have a gap of two years between two jobs, is the  interest received in the PF account during that period taxable? 

— Name withheld on request

 

As per the provisions of the Income-tax (I-T) Act 1961, the accumulated balance due and becoming payable to an employee participating in a recognized provident fund is exempt in the hands of the employee to the extent provided in rule 8 of Part A of the fourth schedule. 

Further, as per the Rule 8 of Part A of fourth schedule to the I-T Act, accumulated balance due and becoming payable from a recognized provident fund shall be excluded from the computation of total income of employee— (i) if he has rendered continuous service with his employer for a period of five years or more, or

(ii) if the service has been terminated by reason of employee’s ill-health, or by contraction or discontinuance of the employer’s business or other cause beyond the control of the employee, or

(iii) if, on the cessation of employment, the employee obtains employment with any other employer, to the extent the accumulated balance due and becoming payable is transferred to his individual account in any recognized provident fund maintained by the new employer; or

(iv) if the entire balance standing to the credit of the employee is transferred to his NPS (National Pension System) account

It is to be noted that the term “accumulated balance due to an employee" means the balance (including accretions thereon) standing to the credit of an employee on the day of cessation of his employment. In such a case, the exemption is available only in respect of accumulated balance (as on the last day of your previous employment) which is transferred to the recognized provident fund account maintained under the new employer. 

Any interest income received post-cessation of your previous employment till transfer to the provident fund account with the new employer would be considered as taxable income.  Hence, for the gap of two years in employment, interest income shall be taxable in your hands.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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