PF is tax-free if an employee has been in service for 5 yrs or more



I worked with Company A from February 2011 to February 2014, and then got transferred to another division of the company that has a separate legal entity. From February 2014 to August 2016, I was issued a different PF membership ID under the same UAN (the PF amount from the previous assignment was transferred recently to this one). Moreover, for service in Company B from September 2016 to August 2020, a new UAN was issued. I have two PF IDs (two IDs issued in Company A were merged by transfer of funds from one to the other) and two UANs. Will my withdrawal of PF from Company A be tax-free or should I transfer the PF from Company A to Company B and then apply for a withdrawal? If opting for the latter, is it advisable to only withdraw partially (that is equivalent to the fund value of Company A) or would the entire corpus be tax-free?

—Vikram Shukla

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 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, your PF balance was transferred between the two legal entities of Company A. Hence, the cumulative period in respect of your PF account with Company A is more than five years. However, your period of employment with Company B is less than five years. Hence, if the balance in Company A’s PF account is transferred to Company B’s PF account, the total cumulative period of contribution to the PF would also be more than five years.

Accordingly, post transfer of PF balance, the cumulative accumulated balance to the extent payable to you at the time of ceasing employment shall be exempt from tax.

However, in case you do not transfer your balance in Company A’s PF account to Company B’s PF account, then only the accumulated balance in Company A’s PF account to the extent payable to you at the time of ceasing employment shall be exempt from tax.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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