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Sunday, November 19, 2017

EPF Taxation Laws Post Leaving Your Employment

Did you know that EPF interest earned post quitting your job becomes taxable from the day you quit? Did you know that your EPF account does not earn any interest 3 years after your retirement? Did you know that withdrawing EPF before 5 years is taxable in many cases, though not all? 
There are many such EPF rules that you should be aware of, for ignorance of law is no excuse...Read on.


Employee Provident Fund (EPF) is one of the most commonly used retirement planning tools used in India. Not only does it provide one of the best possible returns from a debt based investment scheme, it is ultra safe, government backed and follows the EEE taxation strategy i.e. the principle, interest accrued and withdrawals are all tax free. 

The best case scenario is that you do a job until you retire, and withdraw your EPF amount (principle and interest) immediately upon retirement. However, life does not always run on best case scenarios. There will be employees who will quit jobs early, will be axed, will retire and not withdraw, will not transfer as they move jobs and so many more. It is important to understand the fine lines of EPF rules, for ignorance of law is no excuse.

We present a few scenarios here which, we thought, many people, may not be aware of:


Case 1 : If you discontinue your service before 5 years
If you quit your job in less than 5 years, and also decide not to transfer your EPF balance to your new company - and instead to withdraw it, then EPF no more remains a tax free tool. All tax exemptions claimed earlier under Section 80C as well as interest earned in your EPF Account may be in question. However, there are certain conditions under which you may still not be taxed even if you withdraw your EPF corpus before 5 years. 
Read the blog post : Tax Implications on PF Withdrawal Before 5 Years to understand more about this topic.


Case 2 : If you let the EPF account run after quitting your job / being axed
Gone are the days when you retire at your regular retirement age. I know so many people who quit employment for various reasons, say, to be an entrepreneur or a homemaker, or to chase their passion post financial freedom - the way I did. Many such employees have continued to retain their EPF accounts, and also earn interest on the same. 

Unfortunately, they are usually not aware of the tax implications on the interest accretion in the fund after termination or quitting of employment. Taxpayers mistakenly think that the interest which had accrued to their EPF account post their retirement is not taxable. 

It is a fact that when an employee resigns from his job or his services are terminated, his EPF account continues to be "operative" and earns an interest until he applies for withdrawal of the accumulated balance or takes up another job and transfers the balance or until he turns 58 years of age. 

However, the catch is in the taxation of the interest accrued after the quitting date. The interest credited to an employee provident fund (EPF) account after an individual ceases to be in employment is taxable in his hands in the year of credit
So, EPF does not remain a EEE tool post you quitting your job - though your account continues to be operative.

The best way to deal with this rule is to immediately withdraw your EPF balance and invest it wisely in other investment options. This is especially true if you have already spent more than 5 years in a job and have decided to pursue other ambitions in life.


Case 3 : If you let the EPF account run after routine retirement
Out of the temptation to continue to earn a decent interest on a big enough corpus, or out of laziness, or just out of ignorance, many retirees continue to let the EPF account operate and earn interest. 

The IT ruling however states that if an employee retires after 55 years of age and does not apply for withdrawal from his EPF account or transfer of the balance, then post three years from the date of retirement, his EPF account is treated as "inoperative" and stops earning any interest.
Have a look at this EPFO link to understand the complete set of situations in which the account becomes inoperative.

As a retired employee, you do get 3 years to take a decision on what you need to do with your EPF balance. But never let the account become inoperative and ear zero interest. The amounts in EPF balances are usually big, and earning no interest on such big amounts is tantamount to losing a lot of money.


There are many such investing ideas and concepts in the book From the Rat Race to Financial Freedom - that help you take well informed decisions on your wealth - and help you quit this rat race faster - so that you can pursue your passions in life.

Cheers

Manoj Arora
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