Tax on ppf closure before 5 yrs

Did you mean PPF or Reconised provident Fund?

In case of PPF any withdrawal is not permissible before sixth year, so I assume your question is about RPF i.e. Recognised Provident Fund (which is compulsory in case of employed individuals) nothing is taxable subject to the following conditions:

1. Employee left the job after five years of service OR
2. Where Period of service less than 5 years, the termination is due to ill health, discontinuance of business of employer. OR
3. here on re-employment, the balance in R.P.F is transferred to R.P.F with new employer. [For the purpose of computing 5 years period, Period of services rendered with previous employer shall also be included.]

If none of the above conditions are satisfied then the amount not taxed earlier shall be taxable as under:

• Employer’s Contribution and interest there on: Taxable as Salary Income.
  • Employee’s own Contribution : Taxable under the head income from other sources as special income u/s 111 @ 10%.
  • Interest on employee’s contribution: Taxable as income from other sources as special income u/s 111 @ 10%.
  • The basic exemption limit is not applicable on special income.

Originally posted by : CA PALLAVI VOHRA
	Did you mean PPF or Reconised provident Fund? In case of PPF any withdrawal is not permissible before sixth year, so I assume your question is about RPF i.e. Recognised Provident Fund (which is compulsory in case of employed individuals) nothing is taxable subject to the following conditions: Employee left the job after five years of service OR Where Period of service less than 5 years, the termination is due to ill health, discontinuance of business of employer. OR here on re-employment, the balance in R.P.F is transferred to R.P.F with new employer. [For the purpose of computing 5 years period, Period of services rendered with previous employer shall also be included.] If none of the above conditions are satisfied then the amount not taxed earlier shall be taxable as under: Employer’s Contribution and interest there on: Taxable as Salary Income. Employee’s own Contribution : Taxable under the head income from other sources as special income u/s 111 @ 10%. Interest on employee’s contribution: Taxable as income from other sources as special income u/s 111 @ 10%. The basic exemption limit is not applicable on special income.

I mean EPF itself. I'm planning to contribute to VPF to save tax. So, as per your explanation, my contribution towards EPF/VPF and its income will be considered as special income for which tax exemption limit of Rs.2 lakh/2.5 (new) will not be applicable. So, I have to pay full tax for these amount if i close before 5 yrs, right ?

Originally posted by : CA Tarannum Khatri
	Yes, you don't need to pay tax as your income is below exemption limit.

As per CA PALLAVI VOHRA's reply, basic tax exemption till 2/2.5 lakhs will not be applicable on my contribution and its interest to EPF/VPF. What's your take on this ? 
 

 

If closure of PF before 5 year will incur me tax as said above, can i leave my PF account idle for 2-3 years as i will be going for higher studies and can i continue it once i get a job after studies ? Is that ok? 

Yes you can do so. However, as per the amendment in PF Act, interest will not be credited after 3 years to the account remaining idle.

Please also check your cash inflow and outflow for each proposal i.e.if not withdrawn: tax saving on interest as well as principal plus you also get interest almost equivalent to Bank FD of same tenure.