The subscribers of Employees’ Provident Fund Organization (EPFO) will now be able to withdraw up to 90% from their EPF account for the purpose of purchase and construction of their homes. Retirement fund body EPFO has amended the scheme by inserting a new paragraph — 68 BD — to the Employees’ Provident Funds (EPF) Scheme, 1952, to enable a subscriber to make down payment to buy homes and pay EMIs through the EPF account. A senior official has said that since the Labour Ministry has issued a notification for the purpose, the scheme stands amended. However, the big question is: would it be a wise decision to withdraw money from your EPF account to buy a home or availing a home loan would be a better option?
Experts say that buying your first home is rarely an easy task. Now the amendments in the EPF scheme would certainly allow more individuals to raise the funds needed for their home purchase. In that sense, it is a welcome move since it allows EPFO members access to their own funds in order to achieve a vital financial objective.
However, allowing the EPFO subscribers to withdraw up to 90% from their EPF account for the purpose of purchase and construction of their homes has its share of merits and demerits. “The use of EPF to fulfill these purposes would depend upon the quantum of provident fund deposits which would have accumulated over the years. Buying or constructing a home would require a lot of cash to be spent on as the costs to undertake the said activities can be very high. So, you must check how much EPF balance you have,” says Rishi Mehra, CEO of Wishfin.com.
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On the basis of the balance, you can take a calculative decision. If the balance is on the higher side, say in lakhs, and you have more than a decade of the professional journey left before the retirement, you can use the reserve. But make sure not to consume the entire 90% as you can have a challenging post-retirement life to live.
For instance, if 70% of the retirement corpus is sufficient to buy or construct a house, you should consume only 20%-30% and opt for an attractive home loan deal to pay the remaining amount as required to buy or construct a house. This will allow the unused portion of the EPF balance to accumulate and enable you to lead a comfortable life post-retirement besides having a home.
However, “if 20%-30% of the EPF reserves is enough to serve your purpose of home buy or construction, then you can avoid paying the interest that comes with a home loan offered by the banks and housing finance companies (HFCs). If that is not the case, you can either avail a home loan or use both EPF and home loan. The latter option can reduce the interest liability to a considerable degree,” says Mehra.
For example, you have a PF balance of Rs 12 lakh and require a sum of Rs 20 lakh to pay to the property dealer to buy a house. You can then take out Rs 2.5 lakh-Rs 4 lakh from the PF deposits and avail a home loan of Rs 16 lakh-Rs 17.5 lakh. Now, look at the savings you could have using both deposits and loan over the option of loan alone through the calculation in the below table.
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Home Loan vs Home Loan & PF (Assuming an interest rate of 9% per annum):
In the table, you can see the saving of Rs 2,250-3,599, Rs 2,89,836-4,63,737 and Rs 5,39,837-8,63,737, in EMI, interest payout and the overall payment, respectively, by preferring the combined option of PF and home loan over home loan only.
Pros of EPF Option
# It allows you to buy or construct a home without or paying a lower amount of interest.
# Beneficial for those who need few bucks to fulfill the purpose of buying or constructing a home.
Cons of EPF Option
# Retirement corpus gets used up for an expensive deal of home buy & construction.
# You are left with a very little or virtually nothing to enjoy post-retirement.
# Availing the PF option without having other savings could prove doomsday for your financial health.
Who Should Avail EPF & Who Should Avoid?
As far as who should use the provident fund deposit and who should avoid would depend upon the overall EPF contribution, the financial state and the goals of an individual. “Retirees, who have a huge bulk of EPF balance even after using a portion of the same for a home deal, would like this option. But for some who are in the middle of their professional life can’t go solely with the EPF option. These individuals would have to avail a home loan alongside EPF to find the key to their dream home. With this, they can enjoy an affordable home loan journey while securing their future at the same time. Newcomers would have to wait for a fair length of time before they can think of using the EPF for the home purpose,” says Mehra.
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You should also note that the EPF’s primary purpose is to ensure income in retirement for its members. If you withdraw from this fund, you’ll miss out on the benefits of the great returns EPFO provides along with compounded growth over the long term. You’ll then have to find another way to regenerate your retirement fund, which is a challenging proposition. Also, “if you have a large EPF corpus, you can let it earn a handsome 8.65% per annum at the moment (with the possibility of earning higher in the years to come), and take a home loan which you can avail at interest rates around 8.6%. Taking a home loan also allows you additional tax savings through principal and interest repayments up to Rs. 350,000 per annum,” says Adhil Shetty, CEO, BankBazaar.com.
However, if we look at the development thoroughly, the government is also looking to allow EPFO subscribers to use their PF deposits as a mean to repay the home loan EMIs. Well, “to ensure you save for the future and at the same time reduce your interest liability, you should partly use the PF deposits towards the payment of the home loan EMI. The option of paying the EMIs partly through PF deposit could appeal to the most,” informs Mehra.