The interest on the balance in an earlier EPF account becomes taxable if you don’t transfer the corpus to your EPF account with the new employer
If you transfer the balance in your old EPF account to the new one, the interest on the earlier corpus will also become tax-free
Are you an EPF member and have changed jobs? If so, ensure that you transfer your old EPF balance to the new account with the current employer. Though the Universal Account Number (UAN) remains the same across EPF accounts, remember that having the same UAN is not the same as balance transfer. The income tax rules governing the Employees’ Provident Fund (EPF) read with the Income Tax Appellate Tribunal (ITAT) decision in ACIT versus Rajnrekar in November 2017 makes it compulsory to merge old EPF accounts into your current EPF account or face tax implications.
EPF is a mandatory deduction for employees working in companies with 20 or more workers. Here, 12% of your basic salary and dearness allowance is contributed by the employer and another 12% is deducted by the employer from your salary and added to your EPF account. When you switch jobs, the new employer opens a new EPF account. If you forget to transfer the balance accumulated in the old account into the new one, it could increase your overall tax liability.
An EPF account with an employer becomes inoperative once you leave the job. However, the account continues to earn interest, which is taxable, according to the ITAT decision in ACIT versus Ranjrekar case, since you have left the job. If you have taken a break from work, become self-employed or joined a non-EPF-covered firm, you are technically “not employed” for the purposes of EPF. In this scenario, the interest which accrues every year into your old EPF account becomes taxable even if you do not withdraw any money from the account.
If you join a new employer covered by EPF, the new employer opens another EPF account. Since you are employed for the purposes of EPF, the interest on this new EPF account is not taxable. And if you transfer the balance in your old EPF account to this one, the interest on the earlier corpus will also become tax-free.
In many cases, the two accounts may be linked by your Universal Account Number (UAN). However, “UAN linkage is not the same as transfer of balance. Interest on your old account will not be tax-exempt simply because it is linked to the same UAN as the new account. You need to actively transfer the balance,” said Madhu Damodaran, director, HR business services, Co-Achieve Solutions Pvt. Ltd.
Not transferring your old EPF balance to your new account will also mean that the five-year qualifying period for tax exemption is reset to the date of the new account. Let’s understand this with an example. Suppose an employee works at company X for three years and then moves to company Y for another three years. He has EPF accounts at both companies and fails to merge them. He then leaves company Y to start his own business and withdraws the balances from both the earlier EPF accounts. Here, the withdrawals will be taxable even though he has completed six years of service in total. His service period is not counted because he failed to transfer his balance in company X to company Y.