Taxation of EPF Corpus after 3 years and 4.5 months of employment
This query is : Resolved
29 April 2021
On behalf of my 25 year old nephew.
Work Experience Background:
Organisation ‘A’ – 1st Feb, 2017 to 28th Sep, 2018 (20 months) (First job)
Organisation ‘B’ – 1st Oct, 2018 to 15th June, 2020 (20.5 months)
Total Work Experience: 3 years and 4.5 months.
In June 2020, He was laid off from his company due to Covid’s direct impact on company’s operations and revenue. The company, on the work experience letter, refused to give this exact reason for termination. He has not been able to find a job ever since. His last EPF contribution was in July 2020. The balance in his EPF account is 4L+ (EPF+VPF).
His queries are as follows:
1. Since there is a tax liability on those who don’t work continuously for five consecutive years, what should be done with the money?
2. Is it best to withdraw it fully or let it be as he is still able to earn a high interest rate on the balance?
3. What will be his tax liability if he keeps it or withdraws it? If there is a tax liability, will it be on full 4L+ or just the interest earned (to be earned) in FY 2020-21? How does that work?
4. Will the account be dormant now (since it’s almost been a year since his last contribution) or will it be dormant after 36 months after his last contribution? (in his case, July 2023)
5. If there is a tax liability on full balance of 4L+ in this financial year and he doesn't see himself getting a job in the same industry for at least the next 3 months, what will the best way to reduce his tax liability? Can he invest 1,50,000/- in his active PPF account?
Work Experience Background:
Organisation ‘A’ – 1st Feb, 2017 to 28th Sep, 2018 (20 months) (First job)
Organisation ‘B’ – 1st Oct, 2018 to 15th June, 2020 (20.5 months)
Total Work Experience: 3 years and 4.5 months.
In June 2020, He was laid off from his company due to Covid’s direct impact on company’s operations and revenue. The company, on the work experience letter, refused to give this exact reason for termination. He has not been able to find a job ever since. His last EPF contribution was in July 2020. The balance in his EPF account is 4L+ (EPF+VPF).
His queries are as follows:
1. Since there is a tax liability on those who don’t work continuously for five consecutive years, what should be done with the money?
2. Is it best to withdraw it fully or let it be as he is still able to earn a high interest rate on the balance?
3. What will be his tax liability if he keeps it or withdraws it? If there is a tax liability, will it be on full 4L+ or just the interest earned (to be earned) in FY 2020-21? How does that work?
4. Will the account be dormant now (since it’s almost been a year since his last contribution) or will it be dormant after 36 months after his last contribution? (in his case, July 2023)
5. If there is a tax liability on full balance of 4L+ in this financial year and he doesn't see himself getting a job in the same industry for at least the next 3 months, what will the best way to reduce his tax liability? Can he invest 1,50,000/- in his active PPF account?
29 April 2021
1) If you can, you may leave the funds with PF department itself as it would fetch interest for 36 more months (as you have already pointed out). You may withdraw after 36 months.
2) If withdrawn before completion of 5 continuous years, then employer's contribution + interest thereon (from the beginning i.e. Feb2017 till June2020) would be taxed as income from salary; interest on employee's contribution is taxable under other sources; and employee's contribution is not taxable.
3) Even if withdrawn during this FY, I don't think any income tax would be payable on it because up to ₹5 lacs of income, there will not be any tax liability. In case, the income exceeds ₹5 lacs then you may consider opting for savings like PPF etc.
2) If withdrawn before completion of 5 continuous years, then employer's contribution + interest thereon (from the beginning i.e. Feb2017 till June2020) would be taxed as income from salary; interest on employee's contribution is taxable under other sources; and employee's contribution is not taxable.
3) Even if withdrawn during this FY, I don't think any income tax would be payable on it because up to ₹5 lacs of income, there will not be any tax liability. In case, the income exceeds ₹5 lacs then you may consider opting for savings like PPF etc.
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