Benjamin Franklin has succinctly said that in this world nothing is certain but death and taxes.
On the day of retirement every employee smarts under a sense of injustice. He is forced to make room for someone younger (and possibly half-baked) just when he has reached the 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. The foremost amongst all retirement benefits is of course one’s provident fund (PF). Let us take a good look at the various provisions related to PF.
There are 3 types of Provident Funds —
Statutory Provident Fund under the Provident Fund Act, 1925 maintained by government and semi-government organisations, local authorities, universities, recognised educational institutions, railways, air lines, etc. This is a blue-eyed baby. Everything is exempt from tax, without any ifs and buts.
Recognised Provident Fund (RPF) covered by Employee’s Provident Fund and Miscellaneous Provisions Act, 1952 which makes it mandatory for all the establishments with 20 or more workers engaged in industries or business segments (50 for co-operative societies), to participate. Those with fewer employees are also welcome to opt for it.
Employees are free to contribute more than the statutory minimum of 12% (10% for select industries).
Companies or establishments can choose to let the Employees’ Provident Fund Organisation (EPFO) operate the RPF or to on their own, subject to EPFO regulations and the prescribed investment guidelines. If they opt to manage themselves, the interest rate cannot be less than the one declared by the EPFO. If it is higher, the difference is exigible to tax. 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. The recent FA16 has amended the Fourth Schedule to specify that employer’s contribution in excess of 12% of salary will be taxable as salary.
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 withdrawing from PF.
Unless the employee has rendered continuous service for at least 5 years or the discontinuance is due to causes beyond the control of the employee, withdrawals from PF attract tax. These withdrawals also attract the provisions of TDS. Where the accumulated balance gets included in the income of the employee, 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 and the distance between withdrawals (maximum 3) for each purpose differ. Amount not used for the purpose should be returned and this attracts penal interest.
The following are the various purposes —
a) Purchase/construction of a house or acquisition of a housing site.
b) Repairs or renovation of residential house.
c) Repayment of housing loan.
d) Education of self and children.
e) Hospitalisation for self, spouse, children, or dependant parents.
f)Marriage of self, brother or sister.
g) Purchase of any equipment by a handicapped person to minimize the hardships on account of handicap. The government provides social security to its employees through pension. For providing security to non-government employees the RPF has 3 schemes under its wings — the Employees Provident Fund (EPF), the Employees Pension Scheme (EPS) and the Employees Deposit Linked Insurance Scheme (EDLI).
The EPF gives a lump sum retirement corpus, whereas the EPS gives a pension while the EDLIS gives insurance cover. To be eligible for the pension, contributions should be made for at least 10 years. The monthly pension is available on retirement at the age of 58 (50 in a few specified cases).
FA14 has raised some of the limits. Out of the employer’s contribution, 8.33% is channelised to the EPS, subject to a ceiling of ` 15,000, (raised from `6,500) and the balance to the EPF. The central government’s contribution has been raised from the existing 1.16% to 1.79% of wages and the pensionable salary will be calculated on the basis of average salary of the last 60 months instead of 12. The minimum pension has been raised from `800 to ` 1,000 per month. The maximum sum assured under the EDLI has been raised to `3 lakh from `1.56 lakh.
Unrecognised Provident Fund is a bad baby that gets the worst treatment. Employee’s contribution 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 at age of 55. 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.
CBDT Circular 320, dt. 11.1.82, states, “. . . Where income is receivable by the trustees on behalf of an unrecognized provident fund or an unapproved superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession are concerned, they will continue to be charged to tax in the manner prescribed by Sec. 164(liv) as hitherto.
Tax Planning : Notification P 592 F. No. 142/27/94-TPL has empowered the trustees to permit any time within 12 months before the date of retirement on superannuation of an employee, the withdrawal of up to 90% 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. It would be a good idea to contribute up to your maximum capacity a few years (or even days) prior to the retirement. The funds can be made available by taking recourse to the withdrawals, if necessary.
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 would not be exempt from tax.––ONGC Ltd. vs ITO 177 ITR 501. Moreover, GSR 25(E) dt. 15.1.11 states that w.e.f. 1.4.11 interest shall not be credited to the account of a member which has become inoperative account for the last 36 months. Take care.
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