As per the provident fund withdrawal rules, if the employee has not worked for a continuous period of five years, the amount withdrawn is not tax-free in the hands of the employee in the year of receipt. The provident fund (PF) balance taxability is an important concern that every employee needs to take note of. The employee provident fund (EPF) balance is tax-free if the employee has completed continuous service with his or her employer for a period of five years or more. However, there are two important exceptions to this PF rule and the EPF balance may still remain tax-free in the hands of the employee even if the service is less than 5 continuous years.
Firstly, the employee may have to terminate service because of ill-health or due to the employer closing down the business or for any other cause beyond the control of the employee. In such cases, even if there is less than five years of continuous service, EPF balance withdrawn remains tax-free for the employee.
Secondly, even if the employee has less than 5 years of continuous service, if the employee changes employer and transfers the PF balance to the new organisation, the PF amount transferred remains tax-free. Therefore, it is always suggested to transfer the PF balance while changing jobs.
How To Withdraw PF Online
PF transfer can be made from an exempted organisation (trust) to a un-exempted organisation or vice versa. For PF transfer from one un-exempted company to another un-exempted firm is possible online but if one of the company is a trust, then PF transfer process has to be done offline by routing the transfer application through the employer.
For PF calculation purpose, 5 years of continuous service is counted taking into account the period worked with all previous employers. It means the transfer of PF is important to make sure your PF membership is taken care of. For example, if an employee works for 2 years in company A and then joins company B where he works for another 4 years. In both companies, he has not completed 5 years of service, however, while shifting from A to B, he had transfer PF to company B. Therefore, his total calculation of continuous service will become 6 years. As the withdrawal of EPF balance after 5 years of continuous service is tax-free, in this case also, it will be tax-exempt.
As per the PF withdrawal rules, tax on provident fund withdrawal before 5 years is applicable subject to the exemptions as mentioned above. Further, the employer’s contribution along with interest earned, interest earned on employees contribution gets added to employee’s income for that year. Also, all deductions claimed by the employee will have to be reversed and applicable tax will have to be paid by the employee. In addition, any notional tax that would have become payable if the deduction was not availed, will be required to be paid.
Therefore, in order to avoid tax, ideally, transfer PF balance to a new employer as and when you shift job.