EPF interest during unemployment: When does your PF money become taxable?

New Delhi: Provident Fund is meant for financial security of an employee that caters to the life after retirement. The corpus accumulated in the account is primarily aimed at serving the person at the time when regular earnings through a job stops. The interest earned on the amount continues even at the time of unemployment.

Leaving a job may stop your salary, but it does not stop the Provident Fund from earning interest. For those who recently faced a job loss or resigned from their organization, the interest on their PF would continue.

According to EPFO, even if a person retires before the age of 55, the EPF balance would continue to earn interest until the person turns 58 and for a period of 36 months after retirement at the age of 55 or later.

However, it is important to pay attention to the tax applicable to the fund during the period of unemployment.

Five years of continued service and employment gap

Taxability of the EPF depends on the continued duration of service. Under Section 10(12) of the Income Tax Act, zero tax applies to the entire amount, including the employer's contribution, employee's contribution, and interest earned, if the employee has completed five continuous years of service.

However, employees must understand the distinction between the amount accumulated during the years of service and the interest earned during the cessation period.

The interest accrued during the gap might be considered 'income from other sources', unlike the salary. Thus, an employee completing five continuous years of service may be exempted from taxes on the amount corresponding to the service period but still have a tax liability on the interest earned on EPF during the career break.

The employee must understand that the exemption pertains to the total amount, including employee's contribution, employer's contribution, and interest earned, covered by the employment period.

If the employee decides to withdraw the amount during the gap or after joining another organization following a period of unemployment and meets the necessary condition of five continuous years of service, the PF, including the accrued interest, is tax-free, but the treatment of the interest earned during unemployment would be different. It may have tax implications in the year it accrues.

It can be understood with the example of a person who has Rs 15 lakh in the EPF fund and has a two-year gap in employment following that. If we assume that the total interest earned during the two years is Rs 1.5 lakh, then withdrawal of the Rs 15 lakh might be exempted under Section 10(12) of the Income Tax Act, with taxability on the interest amount of Rs 1.5 lakh.

Another layer of taxability

In case the person has not met the necessary requirements for tax exemption, such as breaking EPF contributions before completing five years, and withdraws the fund after a year of unemployment, then an additional layer of taxes comes up. A person may apply for deductions in certain cases, yet PF is not entirely free. This is coupled with the taxes applicable on the interest earned during job loss.