TDS on accumulated RPF balance post cessation of Employment till withdrawal?

WHETHER TDS IS REQUIRED TO BE DEDUCTED ON INTEREST EARNED ON ACCUMULATED BALANCE IN RECOGNISED PROVIDENT FUND FROM THE DATE OF CESSATION OF EMPLOYMENT TILL WITHDRAWAL?

In a recent decision of the Bengaluru ITAT, in the case of “The ACIT, Circle-1(2)(1) Bengaluru vs. Shri Dilip Ranjrekar, in ITA No. 858/Bang/2016, dated 10.11.2017, the assessee, an employee in Wipro Ltd., had retired from the company on 1.4.2002. As on the date of retirement, his accumulated provident fund balance, in the recognised provident fund, of contributions plus interest was Rs. 37,93,588/-. The assessee didn’t withdraw the same immediately, after retirement, but withdrew the accumulated balance of Rs. 82,00,783/-, from the recognised provident fund a/c on 11.4.2011, which comprised of an interest amount of Rs. 44,07,195/-, earned by him on the accumulated provident fund balance from the date of his retirement i.e. 1.4.2002 till the date of withdrawal by him i.e. 11.4.2011. The assessee claimed that the entire accumulated balance in the recognised provident fund account, as withdrawn by him on 11.4.2011, including the said interest amount, earned by him, after his retirement till the date of withdrawal, was exempt u/s 10(12) of the Income Tax Act.

However, the Hon’ble ITAT Bengaluru, held that the exemption u/s 10(12) of the Income Tax Act is available only to a person, who being an employee, after rendering a continuous service of five years, withdraws the accumulated balance in a recognised provident fund, on the date of retirement/cessation/termination of his employment, and any interest earned on the said accumulated balance after the date of retirement/cessation/termination of employment, till the date of withdrawal, is not exempt u/s 10(12) of the Act, and is taxable in the hands of such person, as income from other sources.

In the wake of the above decision of the Bengaluru ITAT, an intriguing question has arisen, as to whether TDS is required to be deducted by the employer company, in the case of an erstwhile employee, who has otherwise rendered a continuous service of five years, on the interest amount earned by such employee, from the date of his cessation of employment, till the date of withdrawal of the accumulated provident fund balance.

In order to answer this question, it needs to be understood that the liability to deduct TDS, doesn’t arise automatically, on a certain payment becoming taxable in the hands of the recipient. The applicability or otherwise of deduction of TDS, on any payment including accumulated balance in recognised provident fund, depends upon the respective governing section in the Income Tax Act, 1961.

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