When does an EPF account become inoperative?

An inoperative EPF account stops earning interest. According to EPFO rules, an EPF account becomes inoperative in four situations. It is also important to know what happens to the EPF account of an employee who leaves his job before the age of the retirement i.e; 58 years.

There are people who leave their job before the age of 58 years to start their own venture or become entrepreneurs. They want to know what will happen to the accumulated balance in their EPF account. Whether it will continue to earn tax-free interest or not?

All such employees’ EPF account will continue to earn interest even after employment till the age of 58 years despite of the fact that, there is no fresh contribution. 

The accumulated balance up to the date of retirement-58 years or end of employment is not taxed but any interest earned on the PF account after resignation, retirement, or end of employment is taxable.

After the resignation from the job but before the age of 58, the EPF account will become inoperative. To prevent it from becoming inoperative, apply for withdrawal within 36 months from the date of becoming eligible to make an application. Once the EPF account becomes inoperative, it stops earning interest.

An EPF account becomes inoperative in four situations as per EPF rules:

1. An employee retiring from service after 55 years.
2. The subscriber migrates abroad permanently.
3. The subscriber passes away.
4. If no claim is received for settlement of the account within 36 months from the date when the amount became payable on cessation of employment. This means that if the subscriber does not apply for EPF withdrawal within 36 months of quitting his job then the account will become inoperative. 

Impact of rules under the Income Tax Act

• According to income tax rules interest accumulated on EPF balance becomes taxable if withdrawn before completion of five years of continuous service. 
• In cases where the employee works for more than one organisation in the initial five years of EPF subscription, then the service will be considered as continuous if EPF balance of the previous organizations are transferred to the current organization. In this situation, it is considered that the employee has rendered continuous service for a period of five years or more for taxation purposes.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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