If you are taking a career break, that doesn't mean that your Employee Provident Fund (EPF) account stops earning interest. Still, many employees are not aware that during this period, the tax treatment of that interest can get a little tricky.
If you have completed five years of continuous service, your accumulated EPF balance can generally qualify for tax exemption. However, that does not necessarily mean all the interest earned on the balance after you leave the job will also be tax-free.
According to CA Chandni Anandan, tax expert at ClearTax, some Income Tax Appellate Tribunal (ITAT) rulings have held that interest earned on an EPF balance after an employee's job ends can be taxable. The key point is the date when you leave employment.
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The EPF balance accumulated up to the date of leaving the job may get the benefit of the exemption. This eligibility also depends on applicable rules. However, the interest that continues to accrue after that date may be treated as “income from other sources” and taxed in the year it is earned.
This means that completing five years of service does not necessarily make EPF interest tax-free. Under the PF rules, EPFO continues crediting interest until the account becomes inoperative (generally 3 years after retirement or till age 58).
When Is EPF Account Interest Taxable Post Service?
Under Section 10(12) of the Income-tax Act, an employee's EPF balance up to the date of leaving the job can be tax-exempt if the required conditions are met. However, some ITAT rulings have said that interest earned after employment ends may be taxed separately.
According to Anandan, such post-employment interest is treated as “income from other sources” and is taxable in the year it is earned.
In simple terms, EPF interest remains exempt while the account is recognised and the person is employed. So, even if an employee has completed five years of service and can withdraw the EPF tax-free, that does not necessarily mean all future interest earned after leaving the job will also remain tax-free.
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When Does PF Interest Become Taxable During Service?
As per the Income Tax rules, there are also certain instances and applicable limits, beyond which interest in PF becomes taxable even during service.
If your employer does not contribute to PF, interest earned on your own contribution above Rs 5 lakh in a financial year can become taxable. If your employer also contributes to PF, interest earned on your own contribution above Rs 2.5 lakh in a financial year can become taxable, as per the rules.
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