Provident Fund (PF) plays a crucial role in retirement planning, providing financial security to employees after they retire. These funds grow over the years through contributions from both the employee and the employer, along with interest. The tax benefits associated with PF make them an attractive savings option for salaried individuals. However, managing PF can become complicated during job changes or retirement. Many employees forget to close their PF accounts when they retire or leave a job, often due to a lack of awareness or the mistaken belief that the account will close automatically.
It is important to understand that the interest earned on the PF balance after retirement or leaving a job is not tax-exempt, unlike the interest earned during active employment. Ignoring this can lead to a significant tax burden. A case that clarifies this issue is the judgment by the Bangalore Income Tax Appellate Tribunal (ITAT) in the case of Assistant Commissioner of Income Tax v. Shri Dilip Ranjrekar, [TS-7760 ITAT 2017 (Bangalore)-O].
The ITAT ruled that the PF balance accumulated as of the retirement date is exempt from tax under Section 10(12) of the Income Tax Act, 1961. However, the interest earned on this balance after retirement is not exempt and must be taxed under "Income from Other Sources." It was also stated by the Tribunal that since the assessee is following accrual system of accounting and to bring to tax the correct income in the hands of the assessee for the relevant period of accrual, this interest should be reported in the respective assessment years when it accrues.
This ruling highlights the importance of understanding and following tax rules related to PF. Failing to close PF accounts’ details can lead to unexpected tax liabilities due to interest earned post-retirement. By staying informed and proactive, employees can make the most of their PF accounts and minimise potential tax issues.
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