Watch out for few basic details while withdrawing PF

There are a lot of people who have their Provident Fund accounts and there is always the question of how they should deal with the withdrawal of the amount here. There can be several situations when the individual would find that they have to take back the money that is accumulated in their provident fund account and the main issue that they would face while planning is the tax implication of such a move. This is important considering the fact that there is often a large corpus that is present and hence the tax element can end up being significant.

Normal circumstances:

The conditions related to the provident fund are such that under normal circumstances this is a way to ensure that there is some amount of regular savings during the working life of the individual. Most of the employees would find that they are part of a recognised provident fund which is a fund to which the Employees Provident Fund Act applies. The amount contributed here is meant to accumulate and the figure will ideally be received at the time of retirement. In reality the situation is different because every time a person changes a job they have to ensure that they transfer their provident fund account balance to the new employer so that the investment in the same account continues over a long period of time. Many people fail to do this or in many cases they actually want to ensure that they take out the available amount in the account and then start the investment afresh with the new employer.  If the investments continue over the life of the employee then it is most likely that the interest earned on the contributions will be tax free in the hands of the employee and the entire amount that they receive from the account will not have any tax element when this is withdrawn.

Tax implication:

However one of the main conditions that need to be fulfilled for the purpose of ensuring that the amounts remain tax free in case there is an early withdrawal from the account is that the period of holding has to be a minimum time period. If the investment is withdrawn before the completion of continuous service of five years or more then the amount that is earned here would be taxed in the hands of the employee. This will result in a situation where there is a tax element that arises because the amount received will no longer be tax free. There will be the necessary tax deduction at source that is undertaken on the amount and when this occurs the employee will receive the net figure after the deduction when they get the amount from their ex employer.

Saving the tax:

There are simple steps that can be taken for the purpose of ensuring that the tax implication is minimised for the individual. One of the first things to undertake would be to ensure that the time period for which the continuous employment have been carried out is known and monitored so that any withdrawal before the time period of five years is not undertaken. This will save a lot of trouble on the tax front. In fact the best route to adopt would be to actually transfer the amount to the new employer because this provides a big benefit in the form of compounding of the amount invested which is not possible otherwise. The other condition when the amount from a recognised provident fund is not taxable, is if the employee has been terminated due to ill health or if the employer has ceased business or if this is some other reason beyond the control of the employee. Otherwise it is upto the employee to ensure that the amount received is not taxable by undertaking the necessary planning.

The author can be contacted at arnavpandya@hotmail.com