Recently, we received a query from a reader regarding some ambiguity in EPF interest rules. The reader was uncertain of how long an EPF account will earn interest if there is no contribution for 3 years or more than 3 years citing EPFO rules.
About the author: Anjesh Bharatiya is a 30+ taxman by profession and a Chemical Engineer by education. He has been an investor in the stock market since age 15! He likes to write about personal finance, stock markets, government policies, taxation, philosophy and football. Also, by Anjesh: (1) Want to trade in stocks? Here is how your income will be taxed. (2) How to use Tax benefits on HRA and home loans (3) How to get tax benefits under a Hindu Undivided Family (HUF). (4) Payment of difference bet compound interest & simple interest in loan accounts: Will you benefit? (5) Guide to e-file ITR4 Income Tax Return For AY 2020-21
EPFO FAQ 44 which says that “How long an employee continues his EPF membership? – There is no restriction of the period of membership. Even after leaving the establishment, a person can continue his membership. However, if no contribution is received into a PF account for 3 consecutive years, the account shall not earn any interest after 3 years from the stopping of contribution.”
EPFO FAQ 55 which says that “How long a member can retain his provident fund in his account? – The membership can be retained till the withdrawal of his provident fund dues. However, if the account does not receive any contributions for more than 3 years, interest won’t be credited to the account after the 3rd year.”
FAQ 141 states “What is an inoperative account? – An account is classified as an inoperative account in which contribution has not been received for 3 years after retirement or permanent migration abroad or in case of death. At present, all accounts will earn interest up to 58 years age of a member”.
EPFO FAQ which 142 says that “Will my inoperative account earn interest? – No. However, at present, all accounts earn interest up to 58 years age of a member.”
The reader pointed out that FAQ 141, 142 contradicted FAQ 44, 55 and wanted to know if it was okay to keep the EPF funds till the age of 58 years or should he withdraw the funds? Let’s try to answer these questions:
How long will an EPF account earn interest if there is no contribution for 3 years or more than 3 years?
The EPF account will continue earning interest till the employee reaches the age of 58. In April 2016, the EPFO decided to give interest on all accounts till the employee attains the age of 58 even if the account does not receive any contributions. An EPF account becomes inoperative as mentioned in the FAQ 141 above in the following conditions:
- No contribution is received/withdrawal application is made even after completing 36 months since retirement after the employee attains the age of 55 years.
- Due to permanent migration abroad
- Due to the death of the employee
So, it can be seen that the EPF account becomes inoperative only in a few conditions the most common of which is no contribution for three years from the time of retirement. In a normal case, the account will continue to remain operative till the employee reaches the age of 58. Regarding the interest, all accounts will continue to earn interest till the employee reaches the age of 58 (FAQ 142).
It seems likely that the FAQs 44 & 55 were not amended when the EPFO decided to pay interest on all accounts till the age of 58. It should also be remembered that accumulated balance in the EPF account is exempt from tax only if the employee has rendered five years of continuous service (in one or more organizations).
However, the interest earned after leaving employment is fully taxable in the hands of the employee and is to be declared under the head “Income from other sources”. So, the interest earned during the period when no contribution is received in the EPF account is taxable.
Is it okay to keep the EPF funds till the age of 58 years or should the funds be withdrawn?
EPF interest rate for the FY 2019-20 was 8.5%. This is an excellent rate considering the rates being offered by other fixed-rate instruments like FDs and Government bonds. The rate for the financial year 2020-21 has not been decided yet but is likely to be still close to 8%. So, withdrawing EPF is not a good option unless the employee is in urgent need of money. The tax implications also need to be remembered, as mentioned above. If you withdraw EPF before completing 5 years of continuous service, the entire withdrawal will be taxable in your hands. So, a decision on withdrawal should be made after considering all these aspects.
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