I resigned from my job after serving for more than 20 years. I haven’t withdrawn my Provident Fund (PF) even though I am without a job for more than three months as the company’s PF trust pays an attractive interest rate over and above the statutory limit. I understand that they will allow me to keep the money in the PF account for three years. I also understand that the interest earned post resignation is taxable. Do I need to show the interest earned in that particular assessment year in the returns and pay tax on the same or do I have to pay interest for the accumulated interest post separation only after I withdraw?
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 i.e. 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. As 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.
However, any accretions to such balance thereafter would be taxable in your hands at your income tax slab rates. Taxes on the same may be paid by way of advance tax or self-assessment tax as applicable. A recent judicial ruling of Bangalore Income Tax Appellate Tribunal (ITAT) has also held that interest earned post cessation of employment shall be considered as taxable in the hands of the individual.
Further, as the interest income received post retirement is in the nature of income from other sources, you may choose to offer the same to tax as per either cash or mercantile system of accounting, as is regularly employed by you.
The provisions relating to keeping the balance in your past employer’s PF trust and payment of interest will need to be separately evaluated by you based on the said PF trust rules as well as relevant provisions of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Send in your queries and views at firstname.lastname@example.org