Do you know, Interest On EPF Is Taxable Even Post-Employment - Outside View by PersonalFN

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Do you know, Interest On EPF Is Taxable Even Post-Employment
Nov 30, 2017

Interest rates are on all fixed income instruments---bank and corporate fixed deposits, Non-Convertible Debentures (NCDs), and bonds ---are dropping.

Ever since the Government decided to keep interest rates on Small Savings Schemes (SSS) market-linked, Public Provident Fund (PPF) and National Savings Certificate (NSC) have also started fetching lower returns. However, due to the pressure of trade unions, the Government is not revising downwards the interest rates on Employee Provident Fund (EPF).

The interest earned is completely tax-free in the hands of EPF subscribers. As a reason, many EPF subscribers refrain from withdrawing their balance even after they retire or quit their job with the hope of earning attractive tax-free interest.

Unfortunately, this is entirely an unfounded perception. Shedding some light on the subject, Mr Amarpal Chadha, partner and India mobility leader, EY India, said, "Post-employment, whether on account of termination, resignation or retirement, several employees continue to maintain their EPF accounts and earn interest on the same. Unfortunately, they are usually not aware of the tax implications on the interest accretion in the fund after termination of employment."

Did you know this?

When you have resigned or been terminated for any reason, your EPF subscription remains active until you take up a new job and transfer the accumulated balance or opt to withdraw it altogether. Active accounts continue to earn interest, but for the period you are not in any formal employment, the interest earned thereon is considered your taxable income.

For retired citizens (those who are over 55), provisions differ slightly. Their EPF account remains active only for three years; thereafter, it becomes inoperative and ceases to earn any interest. In this case too, interest earned on the accumulated balance is taxable.

In other words, the benefit of tax exemption on the interest income can be enjoyed only when you are in the formal employment. So, take care of tax provisions applicable for EPF while declaring your income.

The right approach to retirement planning...

Leaving your EPF money untouched even when you are not in the formal employment isn't a good option, especially if you are young.

While EPF is one of the most popular retirement savings options, you shouldn't rely solely on it. Although EPF invests (upto) 15% of its corpus in equities, which earns higher returns, it continues to be a debt-dominant savings option. Hence, you should not rely exclusively on EPF for your retirement planning. Also consider investing in equity-oriented mutual funds to satisfy your long-term goals such as retirement planning.

As you might be aware, long-term capital gains on equity investments are exempt, i.e. profits on holding over a year are non-taxable as per the current Income-tax provisions. If you aim to earn tax efficient and better inflation-adjusted returns to build a retirement kitty, equity is a promising asset class; but, do consider your risk profile and investment horizon before allocating your hard-earned money.

A disciplined approach and charting your asset allocation right is imperative while investing -- be it any financial goal.

If you have a few years to go before retirement, we strongly suggest you sign up for the very popular service - The Retirement Letter. With every monthly issue of The Retirement Letter, we will walk you through the complete journey that can lead you to a self-sufficient and comfortable retirement. In fact, we will handhold you through every step crucial to plan your dream retirement. And there's much more! So, subscribe to PersonalFN's - The Retirement Letter, right away and take your first step towards a dream retirement!

If you need ethical, trustworthy, and unbiased advice to plan your retirement with enough handholding, PersonalFN's Retirement Planning Service can be of immense help. Under our Retirement Planning service, you will receive the full financial planning service to plan for your Retirement. This service includes:

  • Quantification of your retirement goal
  • Your personal Risk Profile Analysis
  • Analysis of your overall financial situation including investments, insurance, incomes, expenses, assets and liabilities
  • Developing the ideal asset allocation for you
  • Developing a detailed financial plan, including cash flows, and
  • Making recommendations of investment instruments to achieve your retirement goal
  • Reviewing your overall existing portfolio as well as recommending any necessary changes.

For more information on the Retirement Planning Service from PersonalFN, contact us at (022) 61361200 or write to us at Taking the advice from our team of financial planners, who work as Financial Guardians may enhance your chance of enjoying your golden years of life with peace of mind.

You can also access PersonalFN's EPF calculator here. Also download PersonalFN's latest edition of "Guide To Employee's Provident Fund. In this guide, you will learn all there is to know about the EPF and how it can help you achieve your life goals!

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


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