06/08/2015

No tax on PF withdrawal after 5 years of continuous service

Summary No tax on PF withdrawal after 5 years of continuous service
A person worked in a Indian-based organization for four years. Now he is going abroad for work. Since he has not completed five years of continuous service, his provident fund (PF) withdrawal will be taxable. But if he get Universal Account Number (UAN) and hold the PF for another two years and then put forth the withdrawal request, will I still be taxed?

The UAN is a 12-digit ‘portable’ number allotted to each PF member. It gives them control of their Employees’ Provident Fund (EPF) account and minimises the role of the employer in matters related to a member’s account. However, this does not have any impact on the taxability of PF withdrawal.
Withdrawal of the accumulated balance from a recognized PF is taxable if the employee has not rendered continuous service for five years or more to the employer. While computing the continuous service of five years, the period of previous employment is also included, if the accumulated balance maintained with the old employer is transferred to the PF account of the new employer. We understand that you have rendered service for four years. Assuming that this was your first job or you have not transferred PF balance, if any, from the previous employer, if you withdraw your PF, it shall be taxable in the year of receipt.
 
Total of employer’s contribution plus interest thereon will be taxed as salary. Further, the amount of tax benefit claimed under section 80C of the Income-tax Act, 1961, on account of your contribution to the recognized PF shall also be taxed as salary. Also, the interest on your own contribution shall be taxed as “Income from other sources”. Tax rate would depend on your applicable income slab in each of the financial years (FY) during which PF contributions were made. Surcharge and cess, as applicable, for each of the years will also be payable. If the PF contribution is spread over different years, tax rates of those years would be considered.
 
You would be entitled to avail relief under section 89.
 
Please note that if PF amount is taxable (presuming that your employer maintains accounts with a recognized PF), tax will be deducted at source at 10% if the withdrawal amount is more than Rs.30,000 and the individual has provided the Permanent Account Number (PAN). If PAN is not available, tax would be deducted at maximum marginal rate.
 
In case of change of employment where the accumulated PF balance maintained with the old employer (say, company A) is transferred to the PF account maintained with the new employer (say, company B) and later on the accumulated PF balance maintained with company B is withdrawn, the period of service of four years served with company A will also be counted for the five years of continuous services. Accordingly, since the cumulative years of services would be more than five years, the withdrawal of entire PF from company B will not trigger any tax liability.

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