Tax on PF withdrawal if service is lesser than 5 continuous years
January, 21st 2016
You can withdraw the PF balance only once you cease employment and you need to have a non-employment period of two months after leaving your job. You would be required to fill up the specified form through your employer.
The cumulative PF balance withdrawn from a recognised PF triggers tax liability, if an employee does not render continuous services for a period of at least five years to the employer. While determining the period of continuous service of five years, the period of service rendered to the previous employer(s) should also be added if the cumulative PF balance maintained with the old employer has been transferred to the PF account of the new or current employer.
We have assumed that either your current job is your first job or you have not transferred your PF balance that was with your earlier employers (if any), to the PF account of the current employer.
As the total period of service is less than five years (only four years), tax may be levied on the accumulated PF balance withdrawn in the financial year of withdrawal.
The aggregate of the employer’s contribution to PF and interest earned thereon is taxable as salary. Further, the deduction claimed by you under section 80C of the income-tax Act on your own contribution to the recognised PF shall be taxed as ‘Salary’. The interest earned on your own contribution to PF shall be taxed as ‘Income from other sources’. The tax rate would depend upon your applicable income tax slab in each of the financial years during which the PF contributions were made. Surcharge (as applicable) and education cess shall be applicable for each of the financial years, and will also be payable in addition to the basic income tax. You can avail relief under section 89.
However, if you transfer the accumulated PF balance maintained with the current company to the PF account maintained with new employer and later on withdraw the accumulated PF balance maintained with the new company as per the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, while computing the period of continuous service with the current employer then, the period of service rendered with the previous company will be included. Accordingly, where the cumulative years of service with the previous and new employers are more than five years, PF withdrawal may not trigger any tax liability.