Tax Talk: Why it doesn’t make sense to withdraw your PF amount at time of switching job
Retaining the amount in the PF account helps the fund grow with a compound effect. Also, the interest (for FY14, the rate is likely to be 8.75%) per annum earned on the balance in a recognised PF account is tax-exempt, thus making it a good investment option. When a person changes jobs, the PF balance can be transferred from the previous employer to the new one, so that the pace of growth is maintained and any adverse income-tax implication can be avoided.
As per PF regulations, when a person leaves his employment, he is permitted to withdraw the PF amount only if he remains unemployed for more than two months. Otherwise, he is required to transfer the PF balance to the new employer. Now, let us look at the income-tax implications if the amount from a recognised PF account is withdrawn. There are two scenarios from an I-T perspective:
Withdrawal of PF after five years of continuous service
For the purpose of computing continuous service in this situation, as well as ‘situation 2’ discussed below, the period of service with the present employer is considered. However, the period of service with the previous employer can also be added if the PF amount was transferred