Retiring soon? Here’s what happens if you keep your EPF account active after retirement

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Understanding what happens to your EPF after retirement

Your EPF account stops receiving month-on-month contributions if you retire or stop working. The account continues to earn interest, as declared by the Employees' Provident Fund Organisation, for three years from your date of retirement. Beyond that, the account is considered inoperative or dormant; no more interest is credited to it. Many retirees do not know this and seem to think their balances would keep on increasing with time, but the fact is that idle funds in an inoperative account cease accruing returns.

Why tax implications matter more than you think

EPF has an EEE status during your working years, which means contributions, interest, and withdrawals are all tax-free after five continuous years of service. Once the account becomes inactive following retirement, this changes. The interest accrued after the account has become dormant is considered "income from other sources" and is taxed as per your income slab. For instance, if the corpus is Rs. 20 lakh and it earns Rs. 1 lakh as interest after it has become dormant, that gets added to your taxable income. This is a very important factor for retirees who rely on fixed incomes.

Withdrawal timetables and flexibility upon retirement

While the EPFO rules provide that one can withdraw the full amount on retirement, there is certainly some flexibility if one intends to keep the funds partially invested. You are allowed to make partial withdrawals in tranches or let the entire amount continue to earn interest for a maximum period of three years. If you do not withdraw anything within this period, your account automatically becomes inoperative. While the money is safe and can still be accessed, it ceases to grow and accrue interest. The sooner one plans the withdrawals, the better control one will have over post-retirement finances.

To withdraw or not to withdraw your EPF corpus

It all depends upon your financial position and future needs. If you have already saved enough and wish to let your EPF grow with interest for a couple of more years, it makes sense to keep it for up to three years. EPF interest rates, usually in the region of 8 percent, generally outperform other low-risk instruments. However, if you need liquidity or want to manage your taxes more efficiently, it might be wiser to withdraw and reinvest in more flexible options.

Where to reinvest your EPF savings wisely

The withdrawn EPF corpus can be invested either in Senior Citizen Savings Schemes, Post Office Monthly Income Plans, or even in Balanced Mutual Funds. These will ensure steady returns for you with better flexibility and liquidity. Diversifying your corpus should help you strike a better balance between security and growth in retirement. Leaving the EPF account intact after retirement could be an easy option, but it costs you potential returns and unwanted tax liabilities. Timely withdrawals, smart reinvestments, and an understanding of the rules can be a planned strategy that ensures your hard-earned money continues to work for you even after you hang up your boots.