Tax on EPF after Retirement

Table of Contents

Any amount becoming due to a member as a result of (i) supplementary contribution from the employer in respect of leave wages/arrears of pay, installment of arrear contribution received in respect of a member whose claim has been settled on account but which could not be remitted for want of latest address, or (ii) accumulation in respect of any member who has either ceased to be employed or died within a period of thirty six months from the date it becomes payable, or if any amount remitted to a person, is received back undelivered, and is not claimed again within a period of 36 months from the date it becomes payable, shall be transferred to an account to be called the “Inoperative Account”.

Your inoperative EPF account would also give interest. The EPF board has decided to give interest again on such accounts. Since Financial Year 2016-17, all the inoperative account would give interest on the balance amount. In fact ministry of labour has changed the definition of inoperative account. An EPF account would become inoperative only if the employee applies for PF withdrawal or takes up another job within two months.

If you are a salaried individual, in all likelihood every month you contribute 12% of your salary to the EPF account and your employer matches the contribution. The contributions made to EPF then compounds at a rate declared by the EPFO every year. Currently that rate of interest is 8.65% per annum.

Contribution of up to Rs1.5 lakh to your EPF account qualifies for tax deduction under Section 80C. The interest accrued is tax free after 5 years, so what you get on retirement is a tax-free corpus.

How an EPF account becomes Inoperative?

Inoperative EPF accounts are those accounts which do not get any contribution for at least 36 months. These accounts are created because of the job switch. There are many people who do not transfer their PF account with the change of job. The old EPF accounts remain unused for years. These accounts become inoperative after 36 months. But, now the government has relaxed to conditions for the inoperative account. An EPF account turns inoperative under following situations.

  1. Employee retires from service after attaining the age of 55 years
  2. Employee migrates abroad permanently
  3. On death of Account holder
  4. Employee joins another job but doesn’t transfer the PF balance.
  5. The EPF account is also turns inoperative if member withdraws the EPF corpus

The primary reason of inoperative EPF Account is the non-transfer of EPF balance. However, with the use of UAN, the EPF transfer has become very easy.

In order to plug the pre-mature withdrawals from these accounts, which was possible because of administrative shortcomings, the EPFO in 2014 introduced portability through the Universal Account Number (UAN).

So now, all your EPF accounts get tagged under one UAN. Now when you change jobs and give your UAN to the new employer, the employer tags your EPF account to your UAN.

After bringing in portability, in 2016, EPF also decided that an employee would not be able to withdraw contributions of the employer till he/she turned 58. But this caused other problems. The rule would make it difficult for someone quitting formal workforce to withdraw the entire money, and worse, after 3 years the account would become inoperative with no further interest paid.

The e-governance initiatives of EPFO such as Online Registration of Establishment (OLRE), Online Transfer Claim Portal (OTCP), Online Monthly Return for Exemption Establishment, provision to update the accounts in batches have shown some data regarding the inoperative account holders. The number of such subscribers is in crores.

This help desk is being created to assist these members to trace their accounts, which the member then can get it merged with the present account (UAN) or withdraw the same.

All the persons who require such help are requested to give information as per fields mentioned in proforma created. You may leave fields blank if you do not have the information.

In order to get the benefit out of this facility the members are requested to provide correct contact along with email address, if available and only their own mobile number so that EPFO may easily contact them. In case a member does not have a mobile number then a mobile number where he/she may be easily contacted should be provided. Somebody from EPFO will get in touch with you personally in the language of your choice. In case there is no response on the registered mobile the case will be closed.

All members are urged to immediately get their UAN activated before applying for settlement of his/her PF Accounts, the process for which is available at

Reason for giving Interest on Inoperative PF account

The main reason of inoperative account is lethargy on the employee’s part. But, there may be some other tricky situations as well.

The EPF money does not get transferred if there is any error in personal details. There are lacs of such account which have incorrect personal data. And people could not rectify their personal details easily. The employers rarely assist their old employees in rectification.

Also, some employees might get employment in abroad. These employees find themselves unable to transfer the EPF account. The withdrawal process was not easy altogether.

These are the genuine cases of inoperative EPF account. It is unfair t not give interest on such accounts.

Facts about PPF Account

PPF (Public Provident Fund) has remained one of the popular investment alternatives, especially for risk-averse investors who are satisfied with moderate but guaranteed returns. Amidst the rising popularity of other investment platforms like mutual funds, PPF is most trusted because of sovereign guarantee from the government on the principal invested and interest earned.

Public Provident Fund (PPF) which allows us to save money on which no tax is levied. The government has retained the 8% interest rate on the popular PPF or Public Provident Fund (PPF) for the January to March quarter, making it an attractive investment for conservative investors. Apart from tax benefits, the PPF also helps build a sizeable corpus for long-term goals like retirement. In terms of income tax implications, the PPF has an EEE or ‘exempt, exempt, exempt’ status, meaning that it provides subscribers with deduction benefit up to ₹ 1.5 lakh under Section 80C on deposits and tax-free interest and returns. A PPF account allows the facility of partial withdrawal, loan and account extension beyond 15 years. However, despite its acclamation, many investors are not aware of the most important facts associated with the PPF account.

The following are the most important facts associated with PPF:

1. Returns

Currently, PPF offers 7.9% returns that are compounded annually. Basis the yields of government bonds, the Ministry of Finance reviews interest rate every financial quarter. Returns on PPF enjoys Exempt-Exempt-Exempt (EEE) tax status which means that the interest earned, proceeds gathered on maturity and investments are tax exempt under Section 80C of the I-T Act. This tax-free status gives PPF an advantage over 5 year-tax saving fixed deposit from banks and post office as their interest income is taxable as per the tax slab of the depositor.

2. PPF Contribution

An investor can hold a PPF account in his or her name or even open one in the name of a minor but together the contributions can’t exceed ₹ 1.5 lakh in a financial year. Deposits can be made in lump-sum or in 12 instalments.
The subscriber has to deposit a minimum of ₹ 500 a year. If the subscriber is opting for the monthly mode, it is advisable that he/she invest before the fifth of every month. For interest calculation, the balance is taken as the minimum between the fifth day of the month and end of the month. This means that if the subscriber deposits after the 5th of the month, then he/she loses out on a lot of interest income for that particular month.

3. Partial Liquidity

Despite having a lock-in period of 15 years, the PPF account offers partial liquidity through partial withdrawals and even loans. However, availability of such benefits is subject to certain conditions depending upon the balance in PPF and number of years completed. The interest rate charged on loan is more than 2% of the interest earned on the scheme. The principal repaid amount is credited to the subscriber’s account and the interest paid on the loan is amassed to the government.

Nonetheless, from the 7th year onwards, as the holder becomes eligible to withdraw, then she is no longer allowed to borrow loans. Also, subscriber shall not be entitled to get a fresh loan until the earlier loan has been paid off along with the interest.

4. PPF Account Extension

A PPF account matures after 15 years and a subscriber can retain the account after maturity without making any further contribution. The balance in the account continues to earn interest till it is closed. The subscriber can make one withdrawal of any amount in each financial year. However, if a subscriber wants to make further contributions after the PPF account matures, it can be extended in blocks of five years.

There is no limit on the number of times the subscriber can extend the PPF account. But the subscriber has to submit Form H within one year from the date of maturity of the account, if he or she wants to extend the account in the contribution mode

5. Premature Closure

To be eligible for premature closure, you must have completed at least 5 financial years. However, you would be allowed premature closure only in case of the death of the holder, treatment of ailment or life-threatening diseases of the holder, spouse, parent, or children, or if the amount is required for higher education of the holder or minor account holder. You will be required to submit supporting documents from competent medical authority (in case of death or medical emergency) or fee bills for confirmation of admission from recognised institute of higher education in India or abroad.

Remember that premature closure is subject to penalty. You would receive 1% less interest rate than applicable interest rate, from the date of opening the account till the date of such premature closure.

6. Revival of Dormant PPF Account

According to PPF rules, the subscriber has to deposit a minimum of ₹ 500 a year; otherwise, the account becomes inactive. If the account remains dormant, the subscriber cannot make contributions. The subscriber also becomes ineligible for partial withdrawal or loan facilities. But the amount already deposited continues to earn interest and the subscriber can only withdraw full amount at maturity, which is 15 years after the account was opened. To reactivate an inactive PPF account, the subscriber has to visit the bank branch or post office where his account is held, and submit a written request. A penalty of ₹ 50 for each financial year is levied.

7. Loan Against PPF

You can avail a loan against PPF from the 3rd financial year up to the 6th financial year to the extent of 25% of the amount deposited at the end of the second year immediately preceding the year in which the loan is applied. Loan is repayable either in one lumpsum or in two or more monthly instalments within a period of 3 years from the day the loan is sanctioned. After the repayment of the principal amount of the loan, you shall pay the interest in not more than 2 monthly instalments at a rate of 2% p.a. over and above the applicable PPF interest rate of the principal. The interest on the outstanding loan amount shall be charged at 6% p.a. over and above the applicable PPF interest rate, in case you are unable to repay the loan amount in full or in parts within 3 years.

8. Interest Calculations

Experts are of the opinion that one must invest in PPF before the fifth of every month, if opting for monthly contributions. This is advisable because, the balance amount taken for calculation of interest is considered as the minimum between the fifth day of the month and the end of the month.

In case a holder opts for lump sum annual investments, it is advisable to do it before April 5 of every financial year. Even though the interest is credited on March 31 of every financial year, it is calculated on a monthly basis using the minimum balance at the above-mentioned dates.

9. PPF Account Transfer

You can transfer your PPF account for various reasons like job transfer to another city or to get better services if you are not satisfied with your present account provider. To initiate the transfer, you need to visit your existing post office or bank and submit a transfer request. On receiving the request, the provider will provide the closure documents which are essential to transfer and open the PPF account with the new PPF account provider. To initiate a bank to bank PPF transfer opening a savings account with the new bank is a must. If you are an existing customer of the bank, then you can open the PPF account by submitting a fresh PPF account opening form, nomination form and the original PPF passbook of your previous PPF account provider.