PF withdrawal is taxable if service is not rendered continuously for at least five years
I am planning to start my own venture with a friend. I will be quitting my job and starting this venture. My contribution to PF so far is less than five years. If I withdraw the PF will I also get what the employer had contributed? As I am unlikely to take up a job with PF benefits, what will be the implications of this PF contribution, say if I withdraw it after 10 years without further contribution?
Alok Srivastava, Gurgaon
For the purpose of taxation – PF withdrawal is taxable if service is not rendered continuously for at least five years. To understand the intricacies of PF contributions, you need to understand how PF contributions are viewed. Typically, there are four components to any PF contribution: your contribution, the interest earned on your contribution, likewise your employer’s contribution and the interest earned from employer’s contribution. You have the right to all these four parts as an employee, which is applicable irrespective of when you exit employment.
In the absence of continuous service of at least five years, PF withdrawal is taxable. Employer’s contribution and interest on it is taxable as it is clubbed in the hands of employee as salary income. Likewise, your contribution, which has been claimed under Section 80C benefit, will be taxable as salary income. The tax rate will be applicable as per the specific year’s tax rate and here the relief under section 89 would be available. Likewise, interest component on employee’s contribution will be taxable as income from other sources.
In case you leave the account dormant without any further contributions, the account will become inoperative if there are no contributions in the account for 36 months. Once this occurs, the account will not earn interest. You could withdraw your contributions now or do so just before the account becomes dormant after a few years. In case you do think of offering PF to employees in your start-up, you could think of contributing to the PF at that instance.