I’m 50 years old. I quit my job in May last year after working for 15 years. I have accumulated a large corpus of Employee Provident Fund (EPF). Is EPF interest earned over the next few years taxable? Will I be able to withdraw money from EPF each year to meet my living expenses?
— Name masked on request
In accordance with the provisions of the Income Tax (IT) Act 1961, the accumulated balance due and becoming payable to an employee participating in a Recognized Provident Fund (PF) is exempt in the hands of the employee in the measure provided for in Regulation 8 of Part A of the Fourth Schedule.
In addition, pursuant to Rule 8 of Part A of the Fourth Schedule to the Information Technology Act, the accumulated balance due and becoming due from a recognized PF is excluded from the calculation of the employee’s total income. :
(i) if he has rendered continuous service to his employer for a period of five years or more, or
(ii) if service has been terminated by reason of the employee’s ill health, or by the contraction or cessation of the employer’s business or for any other cause beyond the employee’s control, or
(iii) if, on termination of employment, the employee obtains employment with any other employer, to the extent that the accumulated balance due and becoming payable is transferred to his individual account in any recognized PF maintained by the new employer ; or
(iv) if the entire balance remaining to the employee’s credit is transferred to his NPS account.
It should be noted that the expression “accumulated balance due to an employee” designates the balance (including the increases thereon) to the credit of an employee on the date of termination of his employment. In such a case, the exemption is only available with respect to the accumulated balance (on the last day of your employment). Any interest income accrued after your employment ceased would be considered taxable income and should be subject to tax. Since such income would be in the nature of “income from other sources” may be subject to tax according to the method of accounting regularly adopted by you, i.e. cash basis or basis mercantile.
In addition, be aware that the withdrawal of EPF accumulations can only be made in a single payment, post-termination of employment. However, withdrawals in the form of cash advances may be possible in certain specific circumstances (ex: currently the advance being authorized during the covid up to three months of base salary and DA, advance while being unemployed for more than a month, etc.)
Further, in accordance with the provisions of the EPF Scheme, 1952, interest should not be credited to a member’s account from the date it became an inoperative account. Central Government see notification no. GSR 1065(E) dated November 11, 2016 amended the EPF program in which changes were made to the conditions leading to a PF account becoming an inoperative account. After the implementation of these provisions, an account becomes inoperative if no claim has been preferred by the member after reaching age 58/effective date of retirement, whichever is later. Thus, you will continue to earn interest on EPF accumulations until you reach age 58.
Parizad Sirwalla is Partner and Head, Global Mobility Services, Tax, KPMG India.