Accretions in PF accounts during breaks in jobs are taxable
I have worked with two organizations—from December 2017 to June 2018 in the first, and from May 2019 to June 2020 in the second—but have not withdrawn the employees’ provident fund (EPF) amount from either of them. My next job will commence in April 2022. Should I transfer the amount from my first organization’s account to the second and wait, as I do not want to pay taxes? Or is there some other way to proceed?
As per section 10(12), read with rule 8 of part A of fourth schedule of the Income Tax Act, 1961, the accumulated PF balance due and payable to the employee is exempt from tax if he has rendered continuous service for five years or more. Where there are multiple employers, and PF balances are transferred to the account with the most recent employer, the cumulative period of employment with all the employers must be seen to evaluate whether the employee has rendered continuous service for five years or more. In the instant case, your combined period of employment with the first and second organizations is less than five years. Hence, it is advisable that you transfer the balance in the first organization’s PF account to the one in the second.
Once you join the third organization in April 2022, you can transfer the combined PF account balance to the third organization’s PF account. If after addition of your period of service with the third organization, the cumulative period of service is more than five years, the entire accumulated balance payable to you at the time of ceasing employment with the third organization shall be exempt from tax.
However, any accretions to the PF balance for the periods you were on a break from employment and any accretions to the PF balance from the time that you will cease employment with the third organization (i.e. after the last day of working with the third organization till date of withdrawal), would be taxable in your hands.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.
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