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Is EPF earned when not employed taxable?

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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 (PF), 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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I am 50 years old. I quit my job in May last year after working for 15 years.  I have accumulated a large Employee’s Provident Fund (EPF) corpus.  Is EPF interest earned during the next few years taxable? Will I be able to withdraw money from EPF every year to meet my living expenses?

— 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 (PF), 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 the fourth Schedule to the I-T Act, accumulated balance due and becoming payable from a recognized PF 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 PF maintained by the new employer; or

(iv) if the entire balance standing to the credit of the employee is transferred to his NPS 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 employment). Any interest income accrued post-cessation of your employment would be considered as taxable income and is required to be offered to tax. As this income would be in the nature of “income from other sources" the same may be offered to tax as per the method of accounting regularly adopted by you i.e. cash or mercantile basis.

Also, please be advised that withdrawal of EPF accumulations can be made only as a lump sum in one go, post-cessation of employment. However, withdrawal in the form of advances of funds may be possible in certain specified circumstances (e.g. currently advance being allowed during covid up to three months’ basic salary and DA, advance while being unemployed for more than one month, etc.)

Further, as per provisions of EPF Scheme, 1952, interest shall not be credited to the account of a member from the date on which it has become an inoperative account. Central Government vide notification no. G.S.R. 1065 (E) dated 11 November 2016 amended the EPF Scheme wherein changes have been made in the conditions leading to a PF account becoming an inoperative account. After implementation of such provisions, an account becomes inoperative if no claim has been preferred by the member after attaining the age of 58 years/actual date of retirement, whichever is later. Thus,  you will continue to earn interest on EPF accumulations till you attain 58 years of age.

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

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