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Tax on PF withdrawal depends on account holders income slab
June, 19th 2014

I had worked with a firm for three-and-a-half years before I quit. If I have resigned in the previous financial year (FY) and want to withdraw my provident fund (PF) in the current FY, will the company issue a tax certificate? Also, if I have no other source of income in the current year. Can I claim tax refund as a salaried employee would?

Yes, the withdrawal of the accumulated balance from a recognized PF triggers tax liability if the employee has not rendered continuous services for five years or more to the employer. While computing the continuous services 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 or current employer. We have assumed that your job with the previous company was your first job, or you had not transferred your PF balance with your earlier employer, if any, to the PF account. As the total years of service with the company is less than five years, withdrawal of accumulated PF balance will be taxable in the FY of withdrawal.

The total of employer’s contribution plus interest thereon will be taxed as salary. Further, the amount of tax benefit claimed under section 80C for your own contribution to the recognized PF shall be taxed. The interest on your own contribution shall be taxed as “income from other sources”.

The tax rate would depend on your applicable income slab in each of the FY(s) during which PF contributions were made. Further, surcharge and education cess, shall also be applicable for each of the FYs.

Accordingly, since the withdrawal of PF will be taxed at special rates (which relates to the tax rates applicable in each of the FY in which the initial contributions were made), you would be required to pay tax irrespective of the fact that your taxable income considering other income is below basic income exemption limit applicable for the FY of receipt of PF accumulations. However, you would be eligible to claim relief under section 89.

Accordingly, you would also be required to file the tax return reporting the withdrawal of PF, the taxes paid and the relief claimed.

If the employer maintains a private PF trust, the tax would have been deducted at source. In this case, you will receive the Form 16 issued by the PF trust depicting the taxable income and taxes deducted thereon. However, if the PF balance is maintained through Regional Provident Fund Commissioner, you may have to report the income yourself and pay taxes accordingly.

Further, withdrawal of the PF will be as per the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, which requires you to have a cooling period of two months.

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