Is EPF withdrawal taxable post-retirement?

For most salaried employees, provident fund (PF) is a safe haven to accumulate their hard-earned savings for retirement. A PF account guarantees good returns with a risk-free environment. A noteworthy feature, apart from the tax exemption for contributions made by employees, is that the interest rate earned on the PF account is better than any other debt investment. It is also exempted from tax. This has a multiplier effect on the account as the interest rate is retained in the account, and is compounded.

Due to all these factors, many subscribers opt to continue their PF accounts post-retirement, although no contribution is made in the account. If you also want to do this, then better beware. The Income Tax Appellate Tribunal has recently ruled that the interest earned in a PF account post-retirement is taxable.

In a case heard by the Bangalore bench of the Tribunal in November last year, a man had retired from a software company after 26 years, on April 1, 2002. His total amount in his EPF account at that time was Rs 37.93 lakh. Nine years later, on April 11, 2011, the man decided to withdraw the total sum of Rs 82.01 lakh from the EPF account at an interest rate ranging from 8.5% to 9.5%. The amount included the interest rate of Rs 44.07 lakh that had accumulated post his retirement until the date of withdrawal.

The employee who had retired did not offer this interest amount to tax, as he thought that it was exempt under Section 10 (12) of the I-T Act. But during the assessment proceeding for FY11-12, the Assessing Officer sought to levy a tax on this amount and the litigation then moved to the ITAT’s door.

Citing the Section 10 (12) and the definition of ‘accumulated balance’, the ITAT bench said: “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.”

The bench also pointed out that the term ‘accumulated balance due to an employee’ is explained as the balance standing to the credit, or portion of it as may be claimed by the concerned employee under the regulation of the fund “on the day he ceases to be an employee.”

Hence, the ITAT agreed that the rate of interest earned post-retirement is taxable for a retired employee. It added that the aggregate interest of Rs 44.07 lakh would be taxable.

Hence, the conclusion of the aforementioned case study is — Once an individual resigns from a job, then the interest rate earned from that day until the date of the withdrawal would be taxable. It means even if a person resigns at the age of 55 and holds the money in his EPF kitty up to the age of 58 years, the individual will have to pay tax on the interest earned from the age of 55 to 58 years.