I worked for a company from January 2011 to February 2015. I have since joined another company, where provident fund (PF) is not applicable. I want to withdraw the old PF in 2016.
a) Will the entire amount be tax exempt, or will part of this amount be tax exempt?
b) How can I avoid paying tax?
The withdrawal of the accumulated balance from a recognised PF triggers tax implications if the employee has not rendered continuous services for 5 years or more to the employer. While computing the continuous services of 5 years, the period of previous employment is also included, if the accumulated balance maintained with the old employer is transferred to the new employer.
Assuming that the earlier job was your first job, there would be no transfer of accumulated PF balance from a previous employer. As the total period of service with the ex-employer was less than 5 years, withdrawal of accumulated PF balance shall be taxable in the financial year (FY) of withdrawal.
Merely holding the PF account for 5 years will not alter the tax liability. There has to be continuous service with the employer for 5 years or more. The total of employer’s contribution plus interest will be taxed as salary.
The amount of tax benefit claimed under section 80C of Income-tax Act, 1961, on account of your own contribution to the recognised PF, shall be taxed. Also, the interest on your own contribution shall be taxed as ‘income from other sources’. The tax rate would depend on the applicable income slabs in each of the FYs during which the PF contributions were made.
Further, surcharge (as applicable) and education cess shall be applicable for each of the FYs and will also be payable in addition to the basic income tax.
Accordingly, after the withdrawal you would be required to pay tax irrespective of the fact that your taxable income and other income are below the income exemption limit applicable for the FY of receipt of PF accumulations. But you will be eligible to claim relief under the section 89.
The withdrawal of PF will be as per the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, which requires you to have a non-employment period of 2 months after leaving your job.
If you continue to retain the accumulated PF balance maintained with the old employer, and in future if you change job and move to a new company where PF is applicable, you can transfer the accumulated PF balance to the PF account maintained with new employer. In such a situation, at the time of withdrawal of the accumulated PF balance, while computing the period of continuous services with the new employer, the period of services rendered with your ex-employer will also be included.
If the cumulative years of service now exceed 5 years, there will not be any tax implications on PF withdrawal.