Employees do not have to personally open an EPF account or contribute to it. This is done by their employers. However in case of withdrawal, employees do need to personally initiate the withdrawal process. This can be complex, tedious and annoying and is hence often ignored. However, failing to withdraw your EPF amount if you are no longer contributing to it can lead to serious consequences. Here are 5 problems that arise from failing to withdraw your EPF balance:
- EPF interest becomes taxable after leaving your job. This is true even if you move to a company not registered with EPF or become self-employed – in this case you will technically be considered unemployed. If you are moving to another EPF registered company, you can simply transfer your EPF balance to the new employer and keep contributing. Many ex-employees fail to take note of their unemployed status and fail to declare interest on EPF in their income tax returns. This can give rise to penalty and even imprisonment, depending on the magnitude of the failure.
- After 3 years of no contributions, the EPF account is declared ‘in-operative.’ However it continues to earn interest at the rate declared by the EPFO for active EPF accounts. However additional paperwork is required to revive an inoperative EPF account or to withdraw from it.
- After 7 years of no contributions, the EPF balance is transferred to the ‘Senior Citizens Welfare Fund.’ In this case, the EPF balance continues to earn interest, but at a different rate from that declared by the EPFO. At present this rate is 7.9% compared to the 8.55% interest rate declared by the EPFO on operative accounts. You can still claim your money from the Senior Citizens Welfare Fund, but proving ownership becomes a lot harder, especially if your ex-employer has failed to maintain proper records.
- After 25 years in the Senior Citizens Welfare Fund (and hence 32 years of no contributions), your EPF balance is forfeited to the Government of India. This event is called ‘escheat’ in legal terminology. Note that by now the EPF amount would have compounded to almost 12 times its former size (assuming a rate of 8% on average in the EPF). So if you have just say Rs 1 lakh in the EPF at present that you ignore, the amount you will forfeit to the government will be Rs 12 lakh.
So what should you do? You are entitled to withdraw your entire EPF balance after 2 months of unemployment. Remember that moving to a non-EPF registered employer or into self-employment is also technically ‘unemployment.’ You can read the withdrawal procedure here.
Withdrawing EPF money within 5 years of starting the account attracts tax not only on the interest but also on the principal amount if you have availed tax deductions on it. Remember, your EPF balance consists of employer and employee contributions, at 12% each of your basic salary + dearness allowance. The employee contribution bit is eligible for a tax deduction up to Rs 1.5 lakh under Section 80C. If you have claimed this deduction in previous years but withdraw the EPF within 5 years, the deduction is reversed and the previous contributions also become taxable. Hence, in certain limited cases, you may wish to delay your EPF withdrawal to 5 years after opening to the account. However you may also lose track of your EPF details in this time period and doing the paperwork after the account becomes inoperative is also much harder. Hence even consider this factor, it may be best for you to withdraw your EPF balance after leaving your company.