Some individuals prefer to continue their Employee Provident Fund (EPF) even after retirement. They value the high interest rates, safe investment, and tax exemptions associated with the EPF. However, there are essential considerations to be aware of.
Continuing EPF Membership After Retirement
EPF membership is not bound by job status or retirement. It’s a flexible option that allows individuals to remain members of the Employees Provident Fund Organization (EPFO) even after leaving their jobs or retiring. There is no age limit for EPFO membership, giving you the freedom to manage your funds as you need them.
However, interest will only accrue on the funds in the EPF account if the employee-employer relationship and monthly contributions continue.
According to recent amendments, if an employee retires after age 55 and does not withdraw the EPF corpus, interest will stop accruing 36 months after the last employer contribution.
This means that while the funds will continue to earn interest after active contributions cease, the interest amount will be taxable based on the account holder’s income tax rate.
Implications of Not Withdrawing Funds
It’s crucial to be proactive in managing your EPF account. The account will become inactive 36 months after the last employer contribution.
If the funds are not claimed within seven years of the account becoming inactive, they will be transferred to the Senior Citizens Welfare Fund. The central government can claim the funds if the amount remains unclaimed for 25 years after that transfer.
Tax on EPF Interest
The interest earned after the last active contribution is considered taxable income classified as ‘income from other sources’ and is subject to the account holder’s income tax slab rate.
Understanding the tax implications will help you make informed decisions about your EPF funds. However, interest earned before this point is exempt from tax.
Since EPFO does not deduct tax at source, the account holder is responsible for calculating and paying the tax on this interest.
This tax will not appear in Form 26AS, which details all taxes deducted at source, so it is important to keep track of it when filing your tax returns.
Account holders are responsible for reporting this interest income when filing their tax returns. For an account holder in the highest income tax bracket of 30%, the effective interest rate on EPF funds drops from 8.25% to 5.75% after tax.
If you have Rs. 100,000 in your EPF account, you will earn Rs. 8,250 as interest. However, after paying a 30% tax on this interest, your actual earnings will be Rs. 5,775. This post-tax rate may be higher for those in lower-income tax slabs or if EPFO offers a higher interest rate.
Accounting Method for Reporting Income
Tax experts advise that taxpayers follow a specific method for declaring their income. Two recognized methods are accrual and receipt. Individual taxpayers are required to use the accrual method for reporting.