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PF can be a good retirement fund source

Author: AN Shanbhag Sandeep Shanbhag/Wednesday, March 13, 2019/Categories: Exclusive

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PF can be a good retirement fund source

On the day of retirement every employee smarts under a sense of injustice. He is forced to make room for some half-baked individual just when he has reached pinnacle in competency. We complain profusely against the brain drain resulting from our children leaving India for greener pastures abroad. There is a colossal brain drain resulting from forcing a person to become suddenly unemployed just because he has reached a certain age. Be that as it may, it is necessary to plan for this eventuality. You must know not only the quantum of the various terminal benefits but also the related tax implications. Let us at first have a good look at the 3 types of Provident Funds

Statutory Provident Fund

This is maintained by the government and semi-government organisations under the Provident Fund Act, 1925. It is a blue-eyed baby where everything is exempt from tax.

Recognised Provident Fund (RPF)

Covered by the Employee’s Provident Fund and Miscellaneous Provisions Act, 1952, this is mandatory to maintain for all the establishments with 20 or more workers engaged in industries or business segments and 50 or more for co-operative societies.

The reality is that if the number of employees is less than this limit, some of the PF Commissioners refuse to admit this small account. The employer does not have the wherewithal to establish a trust and follow the investment norms.

Companies or establishments can choose to let the Employees’ Provident Fund Organisation (EPFO) operate the RPF or manage it on their own, subject to EPFO regulations and the prescribed investment guidelines. If they opt to manage it themselves, the interest rate cannot be less than the one declared by the EPFO. The accumulations are tax-free and the employer also gets a tax benefit on his contribution.

The employee’s contributions are covered by Sec. 80C. FA16 has amended the Fourth Schedule to specify that employer’s contribution in excess of 12 per cent of salary will be taxed as salary. The current rate of interest is 8.55 per cent p.a.

When an employee shifts his job, he is expected to shift his PF account to the new employer. If he desires to be self-employed, he has to wait for at least two months for closing his PF.

Unless the employee has rendered continuous service for at least 5 years or the discontinuance is due to causes beyond his control, withdrawals from PF attract tax with associated TDS. The AO shall calculate the tax for each concerned year as if the fund had been an unrecognised one.

Partial withdrawals are allowed for some specific purposes. The amount of withdrawal, the number of years of service required, the number of withdrawals (maximum 3) and the distance between withdrawals for each purpose differ. Unused amount should be returned and this attracts penal interest.

Unrecognised Provident Fund

Employee’s contribution to this does not qualify for deduction u/s 80C. The employer’s contribution as well as the interest earned thereon is not treated as income of the year. Both these are taxed at the time of redemption or retirement as profits in lieu of salary. Moreover, interest on employee’s own contribution is taxable u/s 56 as Income from Other Sources.

Employees can withdraw balance on retirement or at age of 55 years.

Early withdrawal is permissible for exigencies such as permanent and total incapacity for work, migration from the country, retrenchment, etc. Employees can take refundable or non-refundable loans for purchase or construction of a house, education, marriage, treatment for specified illnesses, etc., for self and family members.

Tax Planning:

The account holder is permitted any time within 12 months before the date of retirement to withdraw of up to 90 per cent of the amount standing to the credit of the employee. There is no limit on the quantum of voluntary contributions made by an employee to his provident fund.

Now, a warning. Many retired employees do not withdraw their PF balances under the mistaken notion that the interest would continue to be tax-free. The interest credited in the accounts of ex-employees is not exempt from tax. Moreover, interest shall not be credited to the account of a member which has become inoperative account for the last 36 months.

The authors A.N Shanbhag and Sandeep Shanbhag are leading financial advisors. Write to them at


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