Thursday, April 16, 2009


Today , I thought of touching upon the taxation aspect of some of lesser known investments/payments like severance pay,EPF etc. We will examine the taxation aspect of EPF (Employee Pension Fund) VRS (Voluntary Retirement Scheme), Separation pay and Retrenchment proceeds. These days there are lot of people in the workforce who are facing the axe and are either laid off or are retrenched. Most of them do get a lump sum amount as fair compensation towards this. Since this is a one off event , most are unsure about the tax aspect of the money thus received. Lets try and see how money received under these options are treated by the taxman under Indian laws.
1. EPF -
The tax treatment meted out to the proceeds from EPF depends on the tenure of contribution by the concerned person. If the person has contributed for less than 5 years in the fund, then the tax treatment is different , and if its more than 5 years then its different. Lets see both.
A. Withdrawal before 5 years of contribution - Employers contribution to your EPF and the interest accrued on it is fully taxable.- Interest accrued on the employees contribution is taxed as income from other sources.- All PF deductions claimed under Sec 80 C in earlier year stands cancelled.The amount of tax saved due to this will have to be paid now.
B.Withdrawal after 5 years of contribution - The full amount received will be tax free.
The money received by an employee under severance plan form the company will be fully taxed as per his income tax bracket under Indian Income tax laws.
3. VRS -
Here also the treatment depends on the number of years one has completed in job before taking VRS.
1.Before completing 10 years of job - Fully taxable
2.After 10 years of job completion- Upto Rs 5 lakh is tax free.
4. Retrenchment Proceeds-
Upto 5 lakhs received after one gets retrenched is tax free. Beyond that will be taxed.
Hope this gives you sense of tax implication on the money received via these channels.


  1. Hi Rajeev,

    I have PF account with my previous employer and my current employer doesn’t have PF facility as the total number of employees are less than 20 but may start after 6-9 months when the number becomes more than 20. Can I still continue the old PF account? Or as suggested by my previous employer finance person to close the PF account and withdraw the amount? As you said if we withdraw PF b4 5yrs completion then we have to pay tax on that, I have completed 3.5 yrs as of now.

    Please suggest.

    If you suggest to keep EPF account open then
    I have another question. My previous employer is winding up office in India by March end. If I continue to keep that EPF account open, and later when my current employer provides facility for EPF and I transfer my old EPF balance to this new account. Do you see any complications or difficulties at that time as old employer solicitation will not be there. Or in other words how easy it is to do that?

  2. Thanks for sharing such an interesting post with us. You have made some valuable points which are very useful for all readers