There is a big shocking news for all those who planned to enjoy tax-free EPF interest on their EPF accumulation up to their retirement. However, recently Income-Tax Appellate Tribunal (ITAT) changed some misconception in relation to Tax on EPF after resign, retire or terminated. Let us see these changes.
Before we proceed, there are two confusions for many of us. The first one is that how long one will earn the interest rate on his EPF after resign, retire or terminated. The second one is the tax on EPF after resign, retire or terminated. Let us discuss one by one.
I already wrote a post on this in detail (Ref-Interest on Inoperative EPF Accounts up to 58 Yrs of age). However, for your understanding, I will share the same once again.
Before jumping into the recent changes, let us first understand what is the meaning of Inoperative EPF Account. I will try to explain the same through below image.
You might have now got the clarity that your account will turn to be INACTIVE once you attain the age of 58 years. As per EPFO rules, the retirement age is 55 years. If you do not withdraw the money within 3 years from the attainment of the age of 55 years, then such accounts are called as INACTIVE EPF ACCOUNTS.
Now as per the clarification from Ministry of Labour, your account will fetch the regular interest up to the age of 58 years. Whether you contribute to it or keep it idle, EPFO will credit to such accounts as long as you turn 58 years of age.
Here is the press report of the same.
This new rule will be applicable from 11th November 2016.
Now, this is where the changes will come into effect after the recent ruling of Income-Tax Appellate Tribunal(ITAT). This gives a shock to many who continuing their EPF even after resign, retire or terminated.
Because earlier it was believed that amount received is a fully exempt tax on EPF after resign, retire or terminated in case of an employee who is in continues service for a period of 5 years or more. Full exemption is also available for employees who not completed 5 years because of his ill health, discontinuance of employer’s business or any other reason which is not in control of the employee. If the account is transferred to the new employer then the previous service from whom the account is transferred is also considered as a service period.
Now let me discuss the case detail in relation to this change. I will copy the history of the case which is shared by an article published in recent Time of India dated 16th November 2017. After this ruling, tax on EPF after resign, retire or terminated changed drastically.
“In the recent case, the man had retired from a prominent Bengaluru-headquartered software company after 26 years of service, on April 1, 2002, and the total amount in his EPF account then was Rs 37.93 lakh.
Nine years later, on April 11, 2011, he withdrew the grown sum of Rs 82 lakh from his EPF account. This amount included the interest of Rs 44.07 lakh that had accrued post his retirement till the date of withdrawal.
The retired employee did not offer this interest amount to tax, as he viewed it would be exempt under Section 10 (12) of the I-T Act. During assessment proceedings for the financial year 2011-12, the I-T officer sought to levy a tax on this amount and the litigation finally reached ITAT’s doors.
Based on a reading of Section 10(12) and also the definition of “accumulated balance”, the ITAT held: “The exemption is limited to the accumulated balance due and payable to an employee up to the date of his retirement or end of his employment.”
ITAT pointed out that the term “accumulated balance due to an employee” is defined as the balance standing to his credit, or such portion of it as may be claimed by the concerned employee under the regulations of the fund “on the day he ceases to be an employee”.
Thus, the ITAT agreed that the interest earned postretirement was taxable in the hands of the retired employee. However, it added that the aggregate interest of Rs 44.07 lakh should be taxable in the hands of the retired employee, in the respective financial years in which the interest income actually arose.”
This gives us two conclusions to arrive at and they are as below.
# Once you resign from the job, retire or get terminated, then whatever the interest you earn from that day to till your withdrawal will be taxable income for you. Even if you retire at 55 years of age and hold the money up to 58 years of age thinking you will earn the interest up to the age of 58 years, will have to pay the tax from the whatever interest you earned from 55 yrs of age to 58 years of age.
# Such interest income will be taxed in the year in which it is accrued. For example, if your age is 40 yrs and you resigned today. However, you wished to withdraw it in FY 2020-21. Then whatever the interest you earn from today to till FY 2020-21 will be taxed yearly based on the interest amount you earned yearly.
I will explain the same from below image for your clarification.
I hope it is now cleared to all that how the tax on EPF after resign, retire or terminated. Also, it might be disheartened many who planned to enjoy Tax-Free return till their retirement after quitting the job.
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I changed by Job in July 2023 and my EPF with the old company was under recognized trust. My last date in old company was 8th July 2023 and I joined the new organization on 10th July 2023 who were maintaining EPF account with EPFO.
I requested for my PF transfer on March 14, 2024 through Form 13 on online EPFO portal and also sent signed hard copy of Form 13 to old employer in March 24.
The old company however made the transfer in July 2024 only and they have shown the whole interest earned in 23-24 ( including employee , voluntary and employer contribution ) after July 8th as taxable. They are saying that since request for transfer has came late , they have shown the whole interest after July as taxable in Form 16.
Can I claim the interest as non – taxable during ITR filing. What does the rule say about it
Dear Rohit,
Any interest earned during non contributory period is considered as taxable income.
But there were contribution from my new employment under same UAN
Dear Rohit,
Then it is considered as active.
1. I worked from 2000 to 2007, 'seven years' and withdrawn my EPF in 2009.
2. Again in 2011 to 2015 i worked for 3yrs7mnths. After 2015 i started working as a freelancer. For this 2nd period of service the amount in EPF i have not withdrawn till date and getting interest added annually to EPF account.
Now since i have already worked for more than 7 years in my 1st company (but withdrawn EPF amount), then the clause of 5 years continuity should not be applied again to EPF amount earned with 2nd employer. What is the Tax Rule for such scenarios.
Dear Prakash,
It is taxable.
Dear sir,
I was working with a company for 11yrs and 6 months i.e upto March 23.
I have withdrawn my total epf in month of August 23 after 4 months of my last job
Now I have joined a company with provident contribution included in the salary from month of September 23.
What will happen to my epf account and whether I have to pay any tax on epf withdrawal done as now the balance in epf account is nil.
Please update me.
Nishtha
Dear Nishtha,
I have already cleared this point. It is tax free.
Dear Sir,
I mostly worked outside of India during my carrier. However I worked in India during Aug 2016 till April 2019(2years 8 month). I was member of epfo scheme and contributed along with my Employer a good amount.
After April 19 I came back to Middle East for another job. Now I am 59. Is my withdrawal of epf amount is taxable?
Dear Abhay,
I already cleared this point that it is taxable.
Hello,
Interest is taxed in year of accrual , however, which year ITR is the interest to be reported ?
The years of accrual or only in year of withdrawal ?
I was with previous employer for 15 years, gap of 1.5 years and started working again , then how is period of continuous service calculated ?
Thanks
Dear PS,
It is on accrual basis.
Hello Basu,
Very informative article.
I am calculating tax to be paid on EPF interest during non - contribution.
Now EPFO is working on Wage Month. However, ITAT ruling mentions date.
Looking at EPF website.
My Date of Exit is 9 March from previous employer. There is a contribution for Wage Month March in April.
My Date of Joining is 5 October in current employer. There is a contribution for Wage Month October in November.
Should I use exact dates for calculating taxable interest ?
Or is the entire wage month in which there is a contribution as non-taxable ?
Thanks
Dear PS,
For better simplicity, use month rather than the dates.
Can I refile an ITR that has already been submitted, processed and a refund issued to me too? This ITR is for the Fin year 2019-20
I realized an error whiling filling in the NPS details for this financial year 2020-21, and hence wanted to check if i can go back and correct the the ITR for 2019-20
Dear Ganesh,
Yes, you can revise your ITR.
Correct me on this, From the entire PF withdrawn including the interest part, in the ITR I should declare as follows:
- Interest part alone for all the years where there was no salary, to be declared under head 'Income from other sources - Interest from EPF'
- Entire PF amount received minus the above interest part, to be declared under head 'Exempt Income - Sec 10(11) Statutory Provident Fund received'
Is this assumption correct?, please advice
Dear Ganesh,
Yes.
Hi Basu,
I was in service for 1.5 years, then resigned, was unemployed for six months (no contribution to EPF during this period) and then rejoined the same organization in Sep 2017. I transferred my previous accumulated EPF balance to new account (both under the same UAN). So, in aggregate I have completed more than 5 years (1.5 years+3 years 7 months), but with a gap of six months between both the jobs, so
1). Will this be considered as "continuous service"?
2). If I withdraw my EPF corpus now, will it be taxable?
Dear Hari,
The gap is considered as the break up of service. Hence, as per my view, taxable.
Dear Basu
I have migrated from a private company to central government after working for 12 years. But I have ceased to be part of EPFO as we have NPS in center government.
How my interest earned after resign shall be treated. I am doubtful as in contrary to the ITAT explanation I am neither retired nor unemployed.