Tax on PF withdrawal if service is less than 5 years

My wife has worked with different companies during these periods: 1999-2001, 2001-2003, 2003-2005, 2005-2007, 2007-2009 and 2009-2012. She has taken a break since then. She has not got her provident fund (PF) transferred ever to her next employers.

In such a case, will her PF be taxable if we withdraw it from the respective organizations? —Niraj Trivedi The accumulated PF balance withdrawn from a recognized PF is taxable in the hands of the individual employee if she has not rendered continuous services for five years or more to the employer. While computing the continuous service 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.

As you have mentioned, your wife did not transfer the accumulated PF balance maintained with the earlier employers to the PF account of the succeeding employers. As the total number of years of services with each of the employing company is less than five years, withdrawal of the accumulated PF balance will be taxable in the financial year (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 on account of her own contribution to the recognized PF shall also be taxed. The interest on her own contribution shall be taxed as “income from other sources”.

The tax rates would depend upon her applicable income slab in each of the FYs during which the initial PF contributions were made. Further, the surcharge (as applicable) and education cess shall be applicable for each of the years and be payable in addition to the basic income tax. Relief under section 89 shall be available as applicable. If the employers maintain a private PF trust, the tax may be deducted at source. In this case, she 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, she may have to report the income herself and pay taxes accordingly. In future, if she proposes to take up a new job and transfer the accumulated PF balance maintained with these companies to the PF account with new company and then withdraw the accumulated PF balance maintained with the new company, while computing the period of continuous services with the new company, the periods of service rendered with the earlier companies will also be included. Since the cumulative number of years of service with the earlier employers and the new company is likely to be more than five years, there will not be any tax implications on PF withdrawal.

By

Shah Mohammad Abdul Qadir

PGDM 3^rd Semester

IIMT College Of Management,

Greater Noida, U.P.