PF tax-exempt on completion of five years of continuous service


I worked with a company for more than five years, from 2007 to 2013. However, my contribution to provident fund (PF) was for less than five years, from November 2008 to May 2013. The fund was inoperative after 2013. If I withdraw the corpus now, will it be taxable?

It is assumed that you are an Indian citizen.

As per Section 10(12) read with Rule 8 of Part A of the Fourth Schedule of the Income-tax Act, the accumulated PF balance due and payable to an employee, i.e., balance to the employee’s credit on the date of cessation of employment, is exempt from tax, if the employee has rendered continuous service with his employer for a period of five years or more; or if such continuous service (being less than five years) was terminated due to ill health or contraction or discontinuance of employer’s business or any other cause beyond the control of the employee.

In your case, you have rendered continuous service with your employer for a period of five years or more.

However, the participatory and contributory period in the PF fund was less than five years. Based on a plain reading of the law, it can be construed that as your service period is five years or more, the withdrawals (to the extent specified) should not be taxable in your hands.

However, there is an alternate school of thought that as you have rendered contributory service for less than five years from the day you participated and contributed in the PF fund, the withdrawals (to the extent specified) should be considered as taxable in your hands. Hence, this position is not free from doubt specially as the reasons of your non-contributory period is unknown.

Also, it may be noted that a recent judicial ruling of Bangalore ITAT held that interest earned post cessation of employment shall be considered as taxable in the hands of the individual. However, considering that this was a fact-specific case, the applicability of the same would need to be evaluated on a case-to-case basis.

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