Tax On PF Withdrawal: Why You Must Merge Your Previous PF Account With New One

 


Many of us change jobs every 2-3 years to secure higher salaries and better opportunities. However, amid the excitement of a salary hike, people often overlook a crucial task that can result in hefty taxes. We are referring to the consolidation of Provident Fund (PF) accounts. A Provident Fund is an obligatory retirement savings program administered by the government and implemented in Singapore, India, and various other emerging nations. It involves contributions from both the employee and the employer, intending to offer financial assistance to employees upon reaching retirement age. The fund’s primary objective is to ensure that individuals have a stable source of income during their retirement years.

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When you start a new job, you receive a Universal Account Number (UAN) from the EPFO (Employees’ Provident Fund Organisation). Your employer then opens a PF account under this UAN, and both you and your company contribute to it every month. When you switch jobs, you provide your UAN to the new employer, who subsequently opens another PF account under the same UAN. Consequently, your new employer’s PF contributions are directed to this new account. It is essential to merge your previous PF account with the new one after opening the latter.

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Rule of PF withdrawal

As per the regulations, if your tenure with a company is less than five years and the total deposit in your PF account is below Rs 50,000, you are exempted from paying any taxes upon withdrawal. However, if the amount exceeds Rs 50,000, a 10 per cent Tax Deducted at Source (TDS) will be applicable. Conversely, if you have completed five years of service, no tax will be levied on the withdrawal of your PF funds.

Consequences of not merging PF accounts:

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By merging your PF accounts, your UAN will consolidate all your work experiences. This means that if you have worked for 2 years in each of three different companies and have merged your PF accounts, your total experience will be calculated as six years.

However, if you do not merge your PF accounts, the duration of each company will be considered separately. Consequently, if you decide to withdraw funds from your PF account without merging, each company’s two-year duration will be treated individually, resulting in a 10 per cent TDS deduction for each.

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