- Transferring EPF balances to a new employer avoids account inactivity and tax issues
- Inactive EPF accounts earn taxable interest after 3 years without contributions
- Consolidating EPF funds maximizes long-term compounding benefits on the balance
A new job usually entails more paperwork, greater responsibilities and a higher income. Many people overlook a crucial step in their haste: transferring their Employee Provident Fund (EPF) amount to the new employer. Leaving outdated EPF accounts might create complications and eventually reduce retirement funds.
Why Not Transferring EPF Can Hurt
After 36 months without payments, an old EPF account may become inactive. The tax treatment may not be as beneficial even though the EPFO continues to credit interest on such dormant accounts for a maximum of three years following the last contribution. Like interest from other investment products, interest earned on these non-contributory balances may be regarded by tax authorities as taxable income.
As long as the yearly contribution level is not surpassed, active EPF accounts continue to collect interest in a tax-efficient manner. For this reason, it is preferable to consolidate older EPF balances into one active account.
Also Read: 100% Withdrawal Permitted: EPFO Eases Provident Fund Norms — Check Details
Impact of compounding: Since interest is computed on the entire closing balance each year, EPF's strength lies in long-term compounding. This functions best when the balance is consolidated. Over time, the effect of compounding may become less effective when EPF funds are distributed throughout several accounts.
The difference between a single consolidated balance and fragmented balances can be significant in the long-term, leading to a considerably smaller retirement corpus. Compounding works better when older balances are transferred into the current EPF account, which keeps the money growing in one place.
Premature withdrawals: The temptation to make an early withdrawal, which may have tax repercussions, may also increase if EPF is not transferred. Only after five years of continuous service across employers are EPF withdrawals tax-free under Section 10(12) of the Income-tax Act. An employee's complete withdrawal is taxable if they do so before the full five-year period has passed. Completing an EPF transfer helps ensure the service period remains continuous, which supports eligibility for tax-free withdrawals once the five-year period is over.
Pension eligibility: EPF transfers matter not just for provident fund savings, but also for pension-linked records under the Employees' Pension Scheme (EPS). To receive a monthly pension after retirement, an employee must complete 10 years of pensionable service. Since each employment stint carries its own pension service record, not consolidating these through transfers can leave service history fragmented. That fragmentation may create issues when calculating pensionable service later.
As such, transferring your EPF may look like a routine administrative step, but it plays a direct role in keeping your retirement savings tax-efficient, compounding smoothly and aligned with pension eligibility requirements. If you have changed jobs and your EPF is still sitting in an older account, delaying the transfer could cost you more than you expect over the long run.
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