Jobless for months? Your EPF interest may become taxable
What's the story
The Employees' Provident Fund (EPF) is a retirement savings scheme managed by the Employees' Provident Fund Organization (EPFO) under the Ministry of Labour and Employment. Under this scheme, both employers and employees contribute a certain percentage of the employee's salary every month. This contribution earns interest, which is credited to the employee's EPF account annually. But what happens if you take a break from work? Does that affect your EPF contributions and interest earnings?
Contribution pause
Contributions stop during break, but interest keeps accruing
When an employee takes a break from work, their employer stops making contributions to their EPF account. This means that no new money is added to the account during this period.
However, the money already in the account continues to earn interest. So, even if you aren't contributing during your job break, your existing EPF balance keeps growing with interest.
Tax liability
Tax implications of EPF interest during job break
The tax treatment of EPF interest during a job break is a bit complex.
The interest earned on an EPF account is usually tax-free under income-tax laws as long as contributions are being made.
However, once contributions stop, the interest credited to the account becomes taxable in the hands of the employee.
This means that if you take a long break from work, the interest credited to the account could become taxable.
Contribution resumption
Resuming work after a break
When you resume work after a break, your employer starts contributing to your EPF account again.
This means that the account starts earning interest on the new contributions as well as the existing balance.
However, the interest earned between the date of the last contribution and the date on which contributions to the EPF account resume could be subject to taxation.