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Tax on ppf closure before 5 yrs

janes (professional) (28 Points)

01 August 2014

PF/VPF amount is normally free from tax, including interest gained on it. But if its closed before 5yr continuous service, then its taxable.

So, if i close my account before 5 yr but the final amount i receive will not cross my tax limit for that FY, then should i pay any tax on PF/VPF ?

Say, if i have a total income including pf closure amount within 2 lakhs/2.5lakhs(new limit), I dont have to pay tax, right ?

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6 Replies

CA PALLAVI VOHRA (Learner) (140 Points)
Replied 01 August 2014

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.

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TKKKKKK (PRACTICING CA) (3268 Points)
Replied 01 August 2014

Yes, you don't need to pay tax as your income is below exemption limit.

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janes (professional) (28 Points)
Replied 01 August 2014

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 ?

janes (professional) (28 Points)
Replied 01 August 2014

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 ?

janes (professional) (28 Points)
Replied 01 August 2014

CA Tarannum Khatri
CA PALLAVI VOHRA

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?

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CA PALLAVI VOHRA (Learner) (140 Points)
Replied 01 August 2014

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.