Are you an EPF member and have changed jobs? If so, ensure that you transfer your old EPF balance to the new account with the current employer. Though the Universal Account Number (UAN) remains the same across EPF accounts, remember that having the same UAN is not the same as balance transfer. The income tax rules governing the Employees’ Provident Fund (EPF) read with the Income Tax Appellate Tribunal (ITAT) decision in ACIT versus Rajnrekar in November 2017 makes it compulsory to merge old EPF accounts into your current EPF account or face tax implications.
EPF is a mandatory deduction for employees working in companies with 20 or more workers. Here, 12% of your basic salary and dearness allowance is contributed by the employer and another 12% is deducted by the employer from your salary and added to your EPF account. When you switch jobs, the new employer opens a new EPF account. If you forget to transfer the balance accumulated in the old account into the new one, it could increase your overall tax liability.
An EPF account with an employer becomes inoperative once you leave the job. However, the account continues to earn interest, which is taxable, according to the ITAT decision in ACIT versus Ranjrekar case, since you have left the job. If you have taken a break from work, become self-employed or joined a non-EPF-covered firm, you are technically “not employed" for the purposes of EPF. In this scenario, the interest which accrues every year into your old EPF account becomes taxable even if you do not withdraw any money from the account.
If you join a new employer covered by EPF, the new employer opens another EPF account. Since you are employed for the purposes of EPF, the interest on this new EPF account is not taxable. And if you transfer the balance in your old EPF account to this one, the interest on the earlier corpus will also become tax-free.
In many cases, the two accounts may be linked by your Universal Account Number (UAN). However, “UAN linkage is not the same as transfer of balance. Interest on your old account will not be tax-exempt simply because it is linked to the same UAN as the new account. You need to actively transfer the balance," said Madhu Damodaran, director, HR business services, Co-Achieve Solutions Pvt. Ltd.
Not transferring your old EPF balance to your new account will also mean that the five-year qualifying period for tax exemption is reset to the date of the new account. Let’s understand this with an example. Suppose an employee works at company X for three years and then moves to company Y for another three years. He has EPF accounts at both companies and fails to merge them. He then leaves company Y to start his own business and withdraws the balances from both the earlier EPF accounts. Here, the withdrawals will be taxable even though he has completed six years of service in total. His service period is not counted because he failed to transfer his balance in company X to company Y.
Another tax implication of failure to transfer your EPF balance is that old employment periods will not count for pension eligibility. As much as 8.33% of an employer’s 12% contribution is diverted to Employees’ Pension Scheme (EPS). After 10 years of continuous service with an employer in the EPF system, an employee becomes eligible for pension under EPS after reaching the age of 58. Service periods with old employers count, provided old balances are transferred to the current EPF account. “The 10 years’ service period required for eligibility for EPS may also not get fulfilled if old balances are not transferred to the current employer. For the cumulative period to count, transfer of EPF balance is essential," said Amit Gopal, principal, India Life Capital Pvt. Ltd, a Mercer company that is an investment advisory firm.
How to transfer
To transfer the balance from an old EPF account to a new one, you simply have to login to your EPF account online with your UAN and password. Go to the “Online Services" drop-down and select “One Member – One EPF Account Transfer Request". Re-enter your UAN or the old EPF member ID and your account details will be displayed. Select whether you would like your current or previous employer to validate the transfer. Now select the old account and generate a one-time password (OTP). Once you enter the OTP, a request will be sent to your employer (current or previous—both can facilitate transfer to the current EPF account) to process the transfer online.
To transfer offline, fill up Form 13 and submit it to your old or current employer.
If you have failed to declare the EPF interest in your return, you can revise the return before the end of the assessment year. “If the window for revision is closed, it is advisable to pay the applicable tax with interest and file a letter with the income-tax officer along with computation of tax," said Prakash Hegde, a Bengaluru-based chartered accountant.
To avoid the extra tax burden, transfer your old EPF account balance to your current one well in time.