plan to retain your employees’ provident fund balance after retiring? you need to read this.

Plan to retain your Employees’ Provident Fund balance after retiring? You need to read this.

Some people like to keep the money in their Employees’ Provident Fund untouched even after retiring to let it continue to accrue interest. However, certain rules come into play with this, involving taxes, the interest accrual period, and the duration for which the funds can remain unclaimed.

Here’s how it all works.

Remaining a member

An individual can continue to be a member of the Employees’ Provident Fund Organisation (EPFO) even after leaving his or her job, and there is no age restriction on membership.

However, for interest to be paid on the funds, there needs to be an employee-employer relationship and active monthly contributions.

Also read: Why withdrawal of money from your PF is fraught with challenges

According to a recent amendment, in case an employee retires after age 55, interest accruals stop after 36 months from the date of last employer contribution to the account if the account holder doesn’t withdraw the EPF corpus.

This means after active contributions cease, the funds continue to earn interest, but this is taxable at the account holder’s stab rate. More on this later.

Not withdrawing funds

The account becomes inoperative 36 months from the date of the last employer contribution.

If the amount is unclaimed seven years after becoming inoperative, it will be transferred to the Senior Citizens’ Welfare Fund.

If the amount remains unclaimed 25 years after this transfer, the union government has the right to claim the funds.

Tax on interest

The interest earned after the last active contribution is taxable as ‘income from other sources’ at the EPFO account holder’s slab rate. However, the interest accrued up to that point remains tax-exempt.

Read Also: अमेरिका के क्रिप्टो-फ्रेंडली मानदंडों में बदलाव की आशा के कारण बिटकॉइन $100,000 के करीब पहुंच गया है

As the EPFO does not deduct tax at source, this tax does not appear in Form 26AS, which contains details of all tax deducted at source and collected at source. Account holders are responsible for including this interest income under ‘income from other sources’ when filing their tax returns.

Also read: What you can do to get your employer to deposit PF, TDS

For an account holder with the highest income tax rate of 30%, the interest earned on EPF funds drops from 8.25% – the current notified rate – before tax to 5.75% after tax. This post-tax rate can be higher if the account holder is in a low income tax slab or if the EPFO offers a higher interest.

Accounting method

According to tax experts, account holders must follow one method of declaring their income and stick to it. While the system offers two methodsaccrual and receipt – individual taxpayers need to follow the accrual method.

In accrual-based accounting, income is recognised when it is earned, even if the cash has not been received yet. In receipt accounting, income is recognised only once the cash is received.

Balwant Jain, a tax and investment expert in Mumbai, said account holders must choose one method and stick to it year after year. They cannot change the methodology after retirement unless they have compelling reasons to do so.

Also read | New tax regime: Should you continue to invest in tax saving instruments such as PF, PPF, Insurance?

avatar of how to guide

How To Guide

Welcome to How-to-Guide.info, your go-to resource for clear, step-by-step tutorials on a wide range of topics! Whether you're looking to learn new tech skills, explore DIY projects, or solve everyday problems, our detailed guides are designed to make complex tasks simple. Our team of passionate writers and experts are dedicated to providing you with the most accurate, practical advice to help you succeed in whatever you set out to do. From technology tips to lifestyle hacks, we’ve got you covered. Thanks for stopping by – let's get started!

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.