Transfer PF when you switch jobs to accumulate wealth for retirement

You will have to pay tax if you withdraw it before five years of continuous employment

Soon you will be able to transfer your provident funds, when you switch jobs, within three days. The labour ministry has decided to make transfer of Employment Provident Funds online. This will make it  easier for those who are changing jobs to move their accumulated savings to the new organisation.

Currently, the process to transfer your EPF funds is by filling Form 13 and to withdraw the money you need to fill Form 19. Withdrawing your PF can take anywhere between three to eight months depending on how quickly your company submits the documents.

Transferring the PF is faster than withdrawing,which itself should be reason enough for not withdrawing it. Another argument in favour of transferring your PF instead of withdrawing it is that you will be liable to pay tax if you do not have continuous employment for five years. The tax will be charged as per your income tax-slab.

Gaurav Mashruwalla, a certified planner says ideally, one should not withdraw the PF money, since it is building wealth for retirement. “Current interest rates should not be the reason why you withdraw your EPF money. Because once you do so, you can't put money back in the PF account if interest rates go up,” he says.

For the year 2012-13 the interest rate for EPF has been fixed at 8.5 per cent.

However, whether you withdraw or not should depend on your end use of the money. In case you need funds for an urgent need, such as treatment of critical illness, then you can consider withdrawing, not otherwise, Mashruwalla cautions.

For instance, let us assume a scenario where a person has accumulated Rs 1 lakh in his EPF account by age 26 and there is a 10 per cent rise in the contribution every year.

By age 28, the amount will increase to Rs 5.6 lakh. If now, he he moves to another company and withdraws his PF, then over the next three years he will again accumulate close to Rs 6 lakh. But if he had transferred his PF money to his new company, the amount over the same period would have increased to over Rs 13 lakh.

Another reason for not withdrawing the PF is that you will get the pension component. According to Sachin Bhopche, Head HR-Bonanza Capital. "PF is a social security scheme and there is a pension component as well. If you withdraw before 15 years you wont get the pension amount,'' he says.

Year	Age	Initial Amound	Scenario-1	Scenario-2	Amount Withdrawn post tax
1	26	100,000	224,643	224,643
2	27		380,284	380,284
3	28		562,475	562,475	(393733)
4	29		774,779	165,900
5	30		1021,189	362,077
6	31		1306,176	592,687
We are starting with Rs.1 Lakh at age 26 in all scenarios; Rs.10,000/-pm is the contribution which increases every year @10% pa. and we have assumed person under 30% tax bracket Scenario 1: PF amount not withdrawn & Rs 10,000 pm contribution going on scenario 2: Amount withdrawn after 3yrs & Rs 1,0000 pm contribution going on Assuming the individual falls in the 30 per cent tax bracket, the amount he withdrew (Rs 5.62 lakh) is reduced to Rs 3.93 lakhs. But since he starts another job, it is assumed that at age 29 his contribution will be the same and that has been used as the amount for building the PF corpus in the second job.

Another point to remember is that if your EPF is inactive for three years (that is, if no money has been credited), it will stop earning interest. So, it is advisable to withdraw or transfer the amount within three years. And the online process will make it much easier.

In the below table we can clearly see the difference between the corpus built after 6 yrs without any intermediate withdrawal. And, there is the tax angle, too If someone withdraw his/her Provident fund before completing a period of 5 years, then all his previous years income gets recomputed as if the fund was unrecognized from the very beginning.

And all your employer contribution and Interest will get added in your current year income and taxed as salary. And individual's own contribution will be exempted to the extent of not claimed as a deduction earlier. In case of transfer of PF individual can continue with all the benefits he has received.