What happens to your provident fund after early retirement?

Recently, one of our readers - we encourage you to provide your name along with your query - wanted to know what happens with the EPF account upon early retirement and whether it continues to earn tax-free interest.

For those unaware, EPF is a shorthand for employees' provident fund. If you are a salary earner, you can choose to contribute 12 per cent of the basic income and dearness allowance to EPF each month due to the following reasons:

• The monthly contributions are eligible for tax deduction (old tax regime only)
  
• Your savings will earn tax-free interest
  
• The money deposited can come in handy during an emergency
  
• It can be a retirement corpus
  
• When you withdraw your provident fund, the entire amount is exempt from tax

Now that we know what EPF is, let us return to the specifics of the query.

Question 1: What will happen to the EPF account if you retire early?
The account will remain operable for three years after retirement.

For instance, if you retire today - August 2023 - at the age of 52, the EPF account will remain operable until August 2026.

Question 2: Will my EPF money continue to earn interest?
Yes, it will earn interest as long as the EPF account is operable. And as you know, the EPF account is operable for three years after you have retired.

Just an added information, you'll earn an interest of 8.15 per cent this financial year. However, EPF rates are revised by the government each financial year.

Question 3: Is the interest I earn on EPF tax-free?
As long as you are employed and contributing to the EPF, the interest you earn is exempt from tax.

However, once you retire, the interest you earn is taxable. In this case, the interest is added to your annual income and then taxed accordingly.

The last word
Don't forget to withdraw your money while your EPF account is still operable.

Because if you fail to remember and your EPF account becomes inoperable after three years, your hard-earned corpus will stop earning further interest, and inflation will start stealing your wealth.

Suggested read: Can I make multiple withdrawals from EPF for the same purpose?

This article was originally published on August 24, 2023.