PF balance is tax-exempt upon continuous service for five years
I have two different passbooks under one universal account number and both passbooks have not been merged yet. Currently, I am not employed anywhere and my combined service in the previous two companies is 4 years and 9 months. Can I withdraw my full provident fund (PF) and pension contribution amount in total from these two previous companies and that too tax-free?
—Name withheld on request
Yes, assuming you have been unemployed for two months from the date of leaving the last organization, you can withdraw the full PF and pension contributions made during your employment with the previous companies.
From a tax perspective, as per Section 10(12) read with rule 8 of part A of fourth schedule of the Income Tax Act, 1961, the accumulated PF balance due and payable to the employee, i.e. balance to his credit on the date of cessation of his employment, is exempt from tax if he has rendered continuous service for a period of five years or more.
Where there are multiple employers and the PF balances are transferred to the PF account with the most recent employer, the cumulative period of employment with all the employers is required to be seen for the purpose of evaluating whether the employee has rendered continuous service for a period of five years or more. In the instant case, even if you transfer your PF balance from the previous PF account to the latest PF account, the cumulative period shall be less than five years.
Accordingly, irrespective of whether you withdraw the PF balance individually, or after transferring funds to a common account, the PF balance upon withdrawal shall be chargeable to tax in accordance with rule 9 of part A of fourth schedule of the Act as the service period would be considered as less than 5 years.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.
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