INVC NEWS
New Delhi ,
In today’s dynamic job market, it is common for individuals to switch jobs every 2-3 years, seeking higher salaries and better opportunities. However, amidst the excitement of a salary increase, many people often overlook a crucial task that can lead to significant tax implications. We are referring to the merger of provident fund (PF) accounts, which is a vital process when transitioning between jobs.
Understanding Provident Fund
The Provident Fund is a mandatory retirement savings program administered by the government. This program exists in numerous countries and involves contributions from both employees and employers. The primary objective of the fund is to provide financial support to employees upon reaching retirement age, ensuring a steady source of income during their golden years.
The PF Account
When you commence a new job, you are assigned a Universal Account Number (UAN) by the Employees’ Provident Fund Organisation (EPFO). Your employer then opens a PF account under this UAN, and both you and your company make monthly contributions to it. When you change jobs, you provide your UAN to your new employer, who subsequently opens another PF account under the same UAN. Consequently, the PF contributions from your new employer are credited to this new account. It becomes crucial to merge your old PF account with the new one to streamline your PF contributions and maintain a consolidated record.
PF Withdrawal
In certain circumstances, you may need to withdraw the amount deposited in your PF account. As per government rules, if your tenure with a company is less than five years and the total amount deposited in your PF account is below Rs 50,000, you are exempted from paying any tax on the withdrawal. However, if the amount exceeds Rs 50,000, a 10 percent Tax Deducted at Source (TDS) will be deducted. Conversely, if you have completed five years of service, no tax will be levied on the withdrawal of your PF funds.
The Merger of PF Accounts
When you merge your PF accounts, your UAN accumulates all your work experiences. On the other hand, if you do not merge your PF accounts, each company’s experience will be accounted for separately. This fragmentation could lead to TDS deductions when withdrawing the money, as multiple PF accounts might indicate an increased overall balance. Merging your PF accounts not only simplifies the withdrawal process but also ensures that you can enjoy the benefits of a consolidated retirement savings record.
Importance of Merging PF Accounts
Streamlined Record: Merging your PF accounts helps maintain a single, consolidated record of your contributions and work experience. This eliminates the hassle of managing multiple accounts and provides a comprehensive overview of your retirement savings.
Avoiding Tax Implications: By merging your PF accounts, you minimize the chances of higher TDS deductions during withdrawal. A consolidated account ensures that the overall balance remains below the taxable threshold, providing you with significant tax benefits.
Retirement Planning: Having a consolidated PF account facilitates effective retirement planning. It allows you to assess your savings, set realistic financial goals, and make informed decisions about investment opportunities for a secure and comfortable retirement.
Enhanced Portability: Merging your PF accounts improves the portability of your retirement savings. It becomes easier to transfer your funds from one account to another, ensuring continuity and uninterrupted growth of your provident fund.
Comprehensive Benefits: A merged PF account provides a holistic view of your contributions, enabling you to access a range of benefits offered by the EPFO, such as loans, withdrawals, and other financial assistance programs.
