PF Withdrawal – Completed 8 years; Is the tax exemption only for the first 5 years ?

POSTED BY sreejith ON July 12, 2012 11:07 am COMMENTS (8)

Hi

I have served in company A for 7 years and accrued an amount of x in PF. I joined company B and I transferred the PF to the account under company B. I completed 1 year at company B and now plan to join company C. By now the PF amount is x + y . (y is the PF contribution during the past 1 year with company B).

I wish to have more control over the PF amount in terms of liquidity and would like to withdraw the amount instead of transferring to the new PF account in company C. I plan instead to put the amount withdrawn in fixed deposits.

Since my total continuous employment is 8 years, can I withdraw the entire amount ie x + y without any tax liability ? Or is it that I can withdraw only the PF amount accrued during the first 5 years of tenure ie (x *5) /7 as tax free ? I have been claiming tax benefit in all years against the PF contribution under section 80c.

8 replies on this article “PF Withdrawal – Completed 8 years; Is the tax exemption only for the first 5 years ?”

  1. sreejith says:

    Thanks Ashal – Never thought on that angle.

  2. sreejith says:

    Some extra clarification – This would not be the sole emergency fund; This will be a top up on the existing fund. There is a separate liquid fund to the “non-emergency” category.

    The reason why I want to move it out is the the basic salary component in Company C is quite low and in turn the PF contribution would be much lower. I was thinking that moving it out would give me better compounded results.

    But I guess that would not work out since there will not be a 3 months non-employment gap.

    1. Dear Sreejith, there is more to it, Even if we assume you ‘ll remain disciplined enough to not touch this money in between, the impact of taxation as & when you touch it after 5-10-15 years, ‘ll kill a part of your gains. One more thing, if you get this amount transfer to new employer, the effect of compounding ‘ll create a larger pool although now your contribution for fresh money is lower.

      Thanks

      Ashal

  3. BanyanFA says:

    I agree with Ashal & Manish. The moment the funds will be available and tagged as Emergency funds, you may end up tapping it for non-emergency uses. If you can’t consider a long term productive investment, you may rather want to leave the funds in the current EPF and let it grow tax free.

  4. sreejith says:

    Hi Ashal

    Thank you for the answer.

    I plan to put it in Fixed deposits – guaranteed returns, while maintaining liquidity in case of an emergency. The return investment rate would be low, but I am willing to compromise that so that this acts like an emergency fund.

    Another question – What qualifies for continuous service ? I joined Company B after 15 days of leaving company A. Will that be taken as continuous service ?

    Is it good to declare this withdrawal in the returns I file next year as non-taxed income ? Does it matter if I do not declare it at all when filing the next year ITR ?

    1. An EPF account which is transferred from company A to company B , then its considered as the extention and the tenure is added , so in your case your EPF account is just one and total 8 yrs old ( 7 + 1) .

      One word of caution here , while your logic of emergency fund creation using this EPF amount might look good , but note that once you label is as emergency and its access it easy , in all probabilities life will give you enough reasons and reasonings why you should use it at some point of time and all the justifications will come into picture .

      If you dont withdraw it , its getting accumulated some where without much knowledge and thats exactly why you should not withdraw it . Thats my opinion ! .

      Also note that while you are in job , you cant withdraw the money, you need to be unemployed for atleast 3 months and at the time of withdrawal to withdraw the EPF money

      Manish

    2. Dear Sreejith, if the PF amount is to be used for emergency funding, it indicates your finance is in mess. My take is same as dear Manish, let it continue & for that emergency funding, start investing on mly basis even in a simple product like bank RD of 6-9-12 months as per your own comfort.

      Thanks

      Ashal

  5. Dear Sreejith, as the service was in continuation from employer A to B, the X+Y PF withdraw ‘ll be tax free.

    May I know where do you want to use this PF amount after withdrawing the same.

    Thanks

    Ashal

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