Section 10(12)- Tax Exemption on Recognised Provident Fund (RPF) Withdrawals

Section 10(12) of the Income Tax Act governs the tax treatment of withdrawals from a Recognised Provident Fund (RPF), which is the most common PF scheme for private-sector employees in India.

Key Features of Section 10(12)

1. Tax-Free Withdrawal Conditions

✅ Full exemption if:

• Employee has completed 5+ years of continuous service(including different employers if PF transferred)
• Withdrawal is at retirement/resignation(not job switch without break)

❌ Taxable if:

• Withdrawn before 5 years(except in special cases like medical emergency, termination, etc.)
• Employer’s contributions + interest become taxable as “Income from Salaries”
• Employee’s own contributions remain tax-free (already taxed via TDS)

2. Special Cases (Exempt Even Before 5 Years)

• Employee’s death(full exemption to nominee)
• Termination due to ill health/disability
• Business closure by employer

3. TDS Rules

• No TDSif withdrawal after 5+ years
• 10% TDSif withdrawn before 5 years (unless Form 15G/15H submitted)

Examples of Tax Treatment Under Section 10(12)

Example 1: Tax-Free Withdrawal After 5+ Years

Scenario:

• A resigns after 7 yearsof service.
• RPF balance: ₹12 lakh(₹7L employee contribution + ₹5L employer contribution + interest).

Tax Treatment:

• Entire ₹12 lakh is tax-free(since service >5 years).

Example 2: Taxable Withdrawal Before 5 Years

Scenario:

• B switches jobs after 3 yearsand withdraws RPF.
• RPF balance: ₹5 lakh(₹3L employee + ₹2L employer + interest).

Tax Treatment:

• Employee’s contribution (₹3L): Tax-free (already taxed via salary)
• Employer’s contribution + interest (₹2L): Taxable as “Income from Salaries”
• TDS deducted @10%(if PAN provided)

Example 3: Death Claim (Always Exempt)

Scenario:

• C dies after 4 yearsof service.
• Nominee receives ₹8 lakhfrom RPF.

Tax Treatment:

• Full ₹8 lakh tax-free(death claims are exempt regardless of tenure).

Example 4: Withdrawal Due to Medical Emergency (Exempt)

Scenario:

• D withdraws ₹3 lakhafter 2 years for cancer treatment.
• Tax Treatment:
• Exempt from tax(medical emergencies are exceptions to 5-year rule).

Comparison: RPF vs PPF vs NPS

Key Takeaways

✅ Withdraw tax-free after 5+ years (employer + interest exempt)

⚠ Before 5 years? Employer’s part + interest taxable (TDS may apply)

💡 Transfer PF when switching jobs to avoid breaking 5-year continuity

🏥 Medical/terminal illness withdrawals exempt even if <5 years