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Tax on PF withdrawal is based on income slab in respective years
November, 05th 2015

I have read that if the provident fund (PF) subscription is less than five years, then the amount, even if it is withdrawn after five years from its start, is taxable. If I were to get a job in a company where PF is not deducted for those above the threshold limit specified by the provident fund Act, when can it be withdrawn without being taxed?

An individual has to pay tax on the PF withdrawal if the same has been withdrawn from a recognized PF account without rendering continuous services for five years or more with the employer.

Furthermore, upon change in the employing entity, if the accumulated PF balance is transferred to the new PF account of another employer, then the period of previous employment should also be considered as part of continuous service and then, accordingly, the period of five years will be computed.

If an individual has rendered services, including services rendered with the previous employer, for more than five years and the accumulated PF balance from the previous employer has been transferred to the new PF account of the new employer, withdrawal may not be taxed.

In your case, on the assumption that PF may not be deducted by the new employer, and hence the PF account may not be transferred to the new employer, the services rendered with the new employer cannot be considered for computing the period of five years. Accordingly, withdrawal shall be taxable in the year of receipt. Continuing to keep the PF balance and withdrawing after five years of its start will not change the taxability.

If you withdraw, the total of employer’s contribution plus interest thereon as well as the benefit claimed under section 80C of the income tax Act on account of your contribution to the recognized PF shall be taxed as salary. Also, the interest on your own contribution shall be taxed under the head “Income from other sources”.

The tax rate would depend upon your applicable income slab in each of the financial years during which the PF contributions were made.

Separately, just for your information, as per a PF circular, a PF account becomes inoperative if there are no credits or contributions in the account for 36 months and accordingly, interest will not be credited in the said account after that period.

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