EPFO After Retirement: Many people believe that interest earned on the provident fund (PF) is completely tax-free, but the reality is slightly different. As long as an employee remains employed, the interest accrued in their PF account remains tax-free. However, as soon as a person retires and contributions to the account stop, the tax status of the interest changes. Today’s report explains why PF interest becomes taxable after retirement and what impact it has on withdrawals.
Why does the tax status of PF change after retirement?
According to Section 10 of the Income Tax Act, interest earned in the provident fund during employment is considered tax-free. This is because both the employee and the employer continue to contribute to the account from time to time, and it is considered an active account.
But after retirement, as soon as contributions stop, the account becomes inactive as per the provident fund rules. The interest earned on such an account is considered taxable by the Income Tax Department. This interest is added to your taxable income, which can increase your total tax liability.
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Is interest taxable after retirement?
Interest earned on a PF account after an employee’s retirement can be counted under one of two tax categories. The first category is profits from business or profession, and the second is income from other sources. Post-retirement interest earned on provident funds is generally included under income from other sources. This means that this interest will be taxed according to the income tax slab for that year.
Report Interest Annually
Experts suggest that if a person plans to continue their PF account for three years after retirement, it is more appropriate to report interest as income on an annual basis. If interest is not recorded at the time of deposit and is shown simultaneously at the time of withdrawal, the tax liability can increase significantly. When choosing between the accrual and receipt method, it’s important to follow the same method every year.
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Tax Implications When Withdrawing
If the entire amount is withdrawn after the three-year period ends in February 2028, the tax-free interest earned up to the date of withdrawal will be tax-free. However, all interest accrued from the date of retirement to the date of withdrawal will be taxable. This interest will be added to your total income and taxed according to the income tax slab for that year.