The Employees’ Provident Fund Organization (EPFO) recently relaxed its norms to allow subscribers to withdraw up to 90% of the total accumulated corpus for purchase of a home. But we must remember that EPF is long-term savings for retirement and it is not advisable to dig into the retirement funds unless and until there is a dire need of it. Currently SBI offers home loans at 8.5% to 8.65% (50-65 bps above 1 year MCLR of 8.00%) which is similar/marginally lower than the 8.65% offered by EPFO. Refer link- MCLR vs Base Rate for your home loan. Thus EPF withdrawal for home purchase should be one of the last options availed.
Amongst different debt investment options, EPF offers one of the highest post tax returns on investments at 8.65% per annum. Currently this would be significantly higher than bank FDs and PPF amongst others. Thus it should be touched only when all other debt resources have been exhausted. In fact if it is the only resource left it should not be touched keeping in mind one’s retirement needs. Current MCLR rates home loan rates offered by banks would be similar to interest rates offered by EPF. Thus it would make sense to take a home loan rather than dig into your EPF fund. Equity funds are expected to give significantly higher returns of 14-16% but returns are not guaranteed.
EPF withdrawals or loans against the corpus have been fairly relaxed leading to EPF being used as just an accumulation tool rather a pension/retirement corpus. But one should keep in mind the different investment goals for different investment avenues and refrain to the extent possible from using their retirement kitty for life specific needs such as housing, children’s education and having a decent retirement corpus.
Creating a retirement corpus to the quantum of around 20-25 years of current annual expenses is critical to take care of the growing life expectancy and inflation. How much a person needs to save has already been discussed by me in a previous article- How much should one invest for a comfortable retirement today?. Only the incremental surplus above the retirement corpus required should be used for other needs.
Under the new withdrawal norm, an EPF subscriber who is a member of a co-operative or housing society with at least 10 members can withdraw up to 90% from the fund for purchase of a dwelling house or flat or construction of a dwelling house and acquisition of site. The employee has to be a member of EPFO for at least three years and accumulation in the member’s PF account (or together with the spouse), including the interest, has to be more than Rs 20,000. The facility will be provided only once.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’