Accumulated PF balance due and payable to the employee i.e. balance to his credit on the date of cessation of his employment, is exempt from tax if he has rendered continuous service for a period of five years or more
My salary was cut by 10% in April. While the company hasn’t touched my basic pay, it has reduced some of the allowances. How will I be taxed now? Also, I will not be using my leave travel allowance (LTA) for some time. Will I still be taxed?
—Name withheld on request
Assuming that you were entitled only to the reduced salary for the stated period (it’s a reduction and not a deferral), the reduced salary shall be subject to tax in your hands. The principles regarding computation of total income and tax thereon would remain the same. However, depending upon the nature of allowance reduced it may or may not have an impact on the tax exemptions if claimed against that allowance.
The LTA exemption under Section 10(5) is available only if you undertake a journey and satisfy other prescribed conditions. If you choose not to or are unable to travel during FY21, the amount received by you as LTA shall be taxable in your hands. Moreover, LTA exemption would not be available if you have opted for the new tax regime.
I worked for a company for 12 years and then took a two-year break, and I was unemployed during this period. I then took up employment for one year with another company and transferred my provident fund (PF) balance. After one year I took early retirement at the age of 54. Is the second company’s PF contribution and the interest earned on it during that one year period taxable?
—J. Patel
As per Section 10(12) read with Rule 8 of Part A of Fourth Schedule of the Income-tax Act, 1961, the accumulated PF balance due and payable to the employee i.e. balance to his credit on the date of cessation of his employment, is exempt from tax if he has rendered continuous service for a period of five years or more.
Where there are multiple employers and the PF balances are transferred to the PF account with the most recent employer, the cumulative period of employment with all the employers is required to be seen for the purpose of evaluating whether the employee has rendered continuous service for a period of five years or more. In this case, since the cumulative period of employment is more than five years, the balance to the extent payable to the employee at the time of ceasing employment with the second employer shall be exempt from tax. However, any accretions to such balance, thereafter (after the last day of working with the second employer till the date of withdrawal), would be taxable in his hands.
It may also be noted that, for the period that the employee was on break from employment, he would not be considered as an “employee" of any organization and, hence, any accretions to accumulated PF balance due to him for the period when he was not employed with any organization would also be taxable.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at mintmoney@livemint.com
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