There is a big shocking news for all those who planned to enjoy tax-free EPF interest on their EPF accumulation up to their retirement. However, recently Income-Tax Appellate Tribunal (ITAT) changed some misconception in relation to Tax on EPF after resign, retire or terminated. Let us see these changes.
Before we proceed, there are two confusions for many of us. The first one is that how long one will earn the interest rate on his EPF after resign, retire or terminated. The second one is the tax on EPF after resign, retire or terminated. Let us discuss one by one.
How long your EPF account will earn interest after you resign, retire or terminated?
I already wrote a post on this in detail (Ref-Interest on Inoperative EPF Accounts up to 58 Yrs of age). However, for your understanding, I will share the same once again.
Before jumping into the recent changes, let us first understand what is the meaning of Inoperative EPF Account. I will try to explain the same through below image.
You might have now got the clarity that your account will turn to be INACTIVE once you attain the age of 58 years. As per EPFO rules, the retirement age is 55 years. If you do not withdraw the money within 3 years from the attainment of the age of 55 years, then such accounts are called as INACTIVE EPF ACCOUNTS.
Interest on Inoperative EPF Accounts up to 58 years of age
Now as per the clarification from Ministry of Labour, your account will fetch the regular interest up to the age of 58 years. Whether you contribute to it or keep it idle, EPFO will credit to such accounts as long as you turn 58 years of age.
Here is the press report of the same.
This new rule will be applicable from 11th November 2016.
Tax on EPF after resign, retire or terminated
Now, this is where the changes will come into effect after the recent ruling of Income-Tax Appellate Tribunal(ITAT). This gives a shock to many who continuing their EPF even after resign, retire or terminated.
Because earlier it was believed that amount received is a fully exempt tax on EPF after resign, retire or terminated in case of an employee who is in continues service for a period of 5 years or more. Full exemption is also available for employees who not completed 5 years because of his ill health, discontinuance of employer’s business or any other reason which is not in control of the employee. If the account is transferred to the new employer then the previous service from whom the account is transferred is also considered as a service period.
Now let me discuss the case detail in relation to this change. I will copy the history of the case which is shared by an article published in recent Time of India dated 16th November 2017. After this ruling, tax on EPF after resign, retire or terminated changed drastically.
“In the recent case, the man had retired from a prominent Bengaluru-headquartered software company after 26 years of service, on April 1, 2002, and the total amount in his EPF account then was Rs 37.93 lakh.
Nine years later, on April 11, 2011, he withdrew the grown sum of Rs 82 lakh from his EPF account. This amount included the interest of Rs 44.07 lakh that had accrued post his retirement till the date of withdrawal.
The retired employee did not offer this interest amount to tax, as he viewed it would be exempt under Section 10 (12) of the I-T Act. During assessment proceedings for the financial year 2011-12, the I-T officer sought to levy a tax on this amount and the litigation finally reached ITAT’s doors.
Based on a reading of Section 10(12) and also the definition of “accumulated balance”, the ITAT held: “The exemption is limited to the accumulated balance due and payable to an employee up to the date of his retirement or end of his employment.
ITAT pointed out that the term “accumulated balance due to an employee” is defined as the balance standing to his credit, or such portion of it as may be claimed by the concerned employee under the regulations of the fund “on the day he ceases to be an employee”.
Thus, the ITAT agreed that the interest earned postretirement was taxable in the hands of the retired employee. However, it added that the aggregate interest of Rs 44.07 lakh should be taxable in the hands of the retired employee, in the respective financial years in which the interest income actually arose.”
This gives us two conclusions to arrive at and they are as below.
# Once you resign from the job, retire or get terminated, then whatever the interest you earn from that day to till your withdrawal will be taxable income for you. Even if you retire at 55 years of age and hold the money up to 58 years of age thinking you will earn the interest up to the age of 58 years, will have to pay the tax from the whatever interest you earned from 55 yrs of age to 58 years of age.
# Such interest income will be taxed in the year in which it is accrued. For example, if your age is 40 yrs and you resigned today. However, you wished to withdraw it in FY 2020-21. Then whatever the interest you earn from today to till FY 2020-21 will be taxed yearly based on the interest amount you earned yearly.
I will explain the same from below image for your clarification.
Because earlier it was believed that amount received is a fully exempt tax on EPF after resign, retire or terminated in case of an employee who is in continues service for a period of 5 years or more. Full exemption is also available for employees who not completed 5 years because of his ill health, discontinuance of employer’s business or any other reason which is not in control of the employee. If the account is transferred to the new employer then the previous service from whom the account is transferred is also considered as a service period.
Now let me discuss the case detail in relation to this change. I will copy the history of the case which is shared by an article published in recent Time of India dated 16th November 2017. After this ruling, tax on EPF after resign, retire or terminated changed drastically.
“In the recent case, the man had retired from a prominent Bengaluru-headquartered software company after 26 years of service, on April 1, 2002, and the total amount in his EPF account then was Rs 37.93 lakh.
Nine years later, on April 11, 2011, he withdrew the grown sum of Rs 82 lakh from his EPF account. This amount included the interest of Rs 44.07 lakh that had accrued post his retirement till the date of withdrawal.
The retired employee did not offer this interest amount to tax, as he viewed it would be exempt under Section 10 (12) of the I-T Act. During assessment proceedings for the financial year 2011-12, the I-T officer sought to levy a tax on this amount and the litigation finally reached ITAT’s doors.
Based on a reading of Section 10(12) and also the definition of “accumulated balance”, the ITAT held: “The exemption is limited to the accumulated balance due and payable to an employee up to the date of his retirement or end of his employment.
ITAT pointed out that the term “accumulated balance due to an employee” is defined as the balance standing to his credit, or such portion of it as may be claimed by the concerned employee under the regulations of the fund “on the day he ceases to be an employee”.
Thus, the ITAT agreed that the interest earned postretirement was taxable in the hands of the retired employee. However, it added that the aggregate interest of Rs 44.07 lakh should be taxable in the hands of the retired employee, in the respective financial years in which the interest income actually arose.”
This gives us two conclusions to arrive at and they are as below.
# Once you resign from the job, retire or get terminated, then whatever the interest you earn from that day to till your withdrawal will be taxable income for you. Even if you retire at 55 years of age and hold the money up to 58 years of age thinking you will earn the interest up to the age of 58 years, will have to pay the tax from the whatever interest you earned from 55 yrs of age to 58 years of age.
# Such interest income will be taxed in the year in which it is accrued. For example, if your age is 40 yrs and you resigned today. However, you wished to withdraw it in FY 2020-21. Then whatever the interest you earn from today to till FY 2020-21 will be taxed yearly based on the interest amount you earned yearly.
I will explain the same from below image for your clarification.
I hope it is now cleared to all that how the tax on EPF after resign, retire or terminated. Also, it might be disheartened many who planned to enjoy Tax-Free return till their retirement after quitting the job.
This blog is inspired from this article and all credits should be given to this article. This is just a non profit extension to this article so that its reach can be increased.
My views on this are that modi government is behind PF of middle class for long. There thirst for money is increasing and it is set to engulf middle class in it. That is why i essentially say that Modi/Jetli duo is Anti Middle class.
This blog is inspired from this article and all credits should be given to this article. This is just a non profit extension to this article so that its reach can be increased.
My views on this are that modi government is behind PF of middle class for long. There thirst for money is increasing and it is set to engulf middle class in it. That is why i essentially say that Modi/Jetli duo is Anti Middle class.
