EPF Interest Tax: If you are a PF account holder, this news could be significant for you. Employees often take breaks from their jobs for certain periods. This does not mean your account is closed or that you will stop earning interest on it; the EPF balance will continue to accrue interest. However, it is important to understand that simply completing five years of service does not automatically make the interest earned during a career break tax-free.

According to tax expert CS Chandni Anandan, certain ITAT rulings suggest that interest earned on EPF after leaving a job may fall within the tax net. This implies that the ‘five-year service rule’ and the taxability of interest earned after quitting a job are separate issues.

Is an exemption available under Section 10(12)?

Under Section 10(12) of the Income Tax Act, the PF balance accumulated up to the date of leaving employment may be eligible for tax benefits, subject to certain conditions. However, ITAT rulings have held that interest accruing *after* employment ends does not qualify for this exemption. Such interest is classified as ‘Income from Other Sources’ and is taxable in the year it is earned.

Tax calculation when employment is interrupted

Suppose an employee has a balance of ₹10 lakh in their account at the time of leaving a job. If they remain unemployed for a period—during which the PF balance continues to earn interest—the initial ₹10 lakh and the interest accrued after leaving the job must be viewed separately.

If the employee subsequently resumes work and completes five or more years of service, the accumulated balance may qualify for exemption upon withdrawal. However, regarding the interest earned during the two-year gap, ITAT interpretations dictate that it remains taxable as ‘Income from Other Sources’. This is because the interest accrued after leaving the job, rather than while employed.

How ​​much interest will be earned on ₹10 lakh?

If you have ₹10 lakh in your PF account and remain unemployed for two years, you will earn ₹80,000 in interest. While tax exemptions on interest are possible after five years of service—subject to meeting certain conditions—the ₹80,000 interest earned after leaving the job remains taxable in the year it accrues.

What happens if you withdraw EPF during a break in employment?

If you withdraw your EPF without completing five years of service, the withdrawn amount may be taxable under certain circumstances. Conversely, if you have completed five years or more of service, the PF balance may qualify for tax exemption, subject to applicable conditions.

What happens when transferring PF to a new job?

When you start a new job after a break and transfer your PF balance, it helps maintain continuity of service. However, this does not automatically alter the tax status of the interest that had already accrued during the career break.