How does provident fund get taxable?

I have completed four years with my current employer and will be joining a new company next month. Will the Employees’ Provident Fund become taxable if I withdraw the accumulated sum now? What is the way to save on tax on PF withdrawal? - Radha Rao, Hyderabad

Withdrawal on provident fund before continuous service of five years or more attracts tax. Normally, when one transfers the PF with the new employment, the accumulated balance along with the previous employment is considered as part of continuous service. In such cases the five year period can be split across different employers. However, as this is your first job and the total period of service is less than five years, you will be subjected to tax on PF withdrawal and it will be taxable in the financial year (FY) of withdrawal. What it effectively means is that the aggregate of employer’s contribution to PF and interest earned thereon will be taxable as salary. Likewise, the deduction claimed by you under Section 80C of the Income Tax Act, 1961, on your own contribution to the recognised PF, will also be taxed as salary. Moreover, the interest earned on your own contribution to PF will also be taxed as ‘income from other sources’. The tax rate would depend on your applicable income slab in each of the FYs during which the PF contributions were made. And, surcharge and education cess will also be applicable for each of the FYs and payable in addition to the basic income tax. It is thus advisable to wait a year before withdrawing your PF. 

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