Retaining the amount in the PF account helps the fund grow with a compound effect. Also, the interest (for FY14, the rate is likely to be 8.75%) per annum earned on the balance in a recognised PF account is tax-exempt, thus making it a good investment option. When a person changes jobs, the PF balance can be transferred from the previous employer to the new one, so that the pace of growth is maintained and any adverse income-tax implication can be avoided.
As per PF regulations, when a person leaves his employment, he is permitted to withdraw the PF amount only if he remains unemployed for more than two months. Otherwise, he is required to transfer the PF balance to the new employer. Now, let us look at the income-tax implications if the amount from a recognised PF account is withdrawn. There are two scenarios from an I-T perspective:
Withdrawal of PF after five years of continuous service
For the purpose of computing continuous service in this situation, as well as situation 2 discussed below, the period of service with the present employer is considered. However, the period of service with the previous employer can also be added if the PF amount was transferred to the present employer last time the person changed jobs. In this situation, the entire amount withdrawn will be considered as exempt from income, and no taxes are liable to be paid.
Withdrawal of PF within five years of continuous service
In this situation, the employers contribution, together with interest (which has not been taxed earlier), will be taxed as salary. Further, the amount of deduction claimed by the employee in the earlier years under Section 80C will be considered as ineligible and will be reversed. Therefore, taxes that would have been payable for each of the earlier years if the employee was not eligible to claim deduction under Section 80C for his contribution to PF will be considered to fall due in the year of withdrawal. Also, the interest on the employees own contribution will be considered fully taxable as income from other sources.
However, the amount withdrawn from the PF account (even within five years of continuous service) is not considered taxable if the service of the employee has been terminated due to ill-health or discontinuance of employers business or due to any other reason beyond the control of the employee. It is pertinent to note that in terms of the provisions of the income-tax laws, if the PF amount is taxable, the payer is required to deduct income tax at the time of making the payment of the PF amount to the employee.
So, withdrawing the PF amount when one changes jobs has severe income-tax implications if the period of continuous service is less than five years.
The writer is senior manager, Tax and Regulatory Services, PwC India. Views expressed are personal