If you withdraw PF money with contribution period of less than 5 years, not only the entire PF withdrawal will be taxable, but the 80C benefits that you got on self contributions during the service will also be reversed.
Private sector employees changing jobs should transfer the Provident Fund (PF) money from the old organisation to the new one not only to enjoy income tax benefits, but to get pension after retirement as well. This is because, transfer of PF is considered as continuous membership as a member of Employees’ Provident Fund (EPF) for Employees’ Pension Scheme (EPS) as well as Income Tax purpose.
If you withdraw PF money with contribution period of less than 5 years, not only the entire PF withdrawal will be taxable, but the income tax benefits you got u/s 80 on self contributions during the service will also be reversed.
On the contrary, if you transfer the PF money as you hop jobs from one organisation to other, apart from saving the tax outgo, you will become entitled to get pension after retirement.
Here are the eligibility and pension benefits under EPS:
Monthly Member’s Pension
A member shall be entitled to get superannuation pension if he/she has rendered eligible service of 10 years or more and retires on attaining the age of 58 years.
Otherwise, a member will get early pension if he retires before attaining the age of 58 years after rendering eligible service of 10 years or more.
The amount of pension in both cases will be calculated as below:
Monthly member’s pension = (pensionable salary x pensionable service) / 70
Determination of Pensionable Salary
The pensionable salary shall be the average monthly pay drawn during contributory period of service in the span of sixty months preceding the date of exit from the membership of the Pension Fund.
The maximum pensionable salary shall be limited to Rs 15,000 per month unless the existing members, at the option of the employer and employee, had been contributing on salary exceeding Rs 6,500 per month till September 1, 2014 and is contributing on salary exceeding Rs 15,000 after that. Provided the members have to contribute at the rate of 1/16 per cent on salary exceeding Rs 15,000 as an additional contribution.
Determination of Pensionable Service
The pensionable service of an eligible member shall be determined with reference to the contributions (received or receivable) on his behalf in the EPF.
In case of a member who superannuates on attaining the age of 58 years and who has rendered 20 years of pensionable service or more, his/her pensionable service shall be increased by adding a weightage of 2 years.
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Calculation of Monthly Pension
If the monthly superannuation pension of a member, whose pensionable salary is Rs 15,000 and pensionable service is 20 years, the monthly pension will be as follows:
Member’s monthly pension = (15,000 x 22) / 70 or Rs 4,714
So, it is always better not to withdraw PF money, but to transfer it to fetch pension after retirement.