Buying your own house is everyone’s dream. To fulfill this dream, people take help of their years of savings and investments. Seeing the huge amount deposited in the Employees Provident Fund (EPF), employed people often think that they should withdraw money from PF to reduce the burden of home loan or to make down payment. Employees Provident Fund Organization (EPFO) also allows partial withdrawal to buy a house. But is doing so a wise financial decision? According to financial experts, one should at least think twice before doing this. Let us understand in simple language why touching the EPF corpus to buy a house can be harmful for your future and what are the better alternatives.
What things are important to understand?
- Relaxation of rules: EPFO allows withdrawal of money from EPF balance for purchase or construction of house/plot on completion of minimum 5 years of service.
- Major disadvantages of compounding: The safe and tax-free interest received on EPF multiplies your money till retirement, which gets wiped out with withdrawals.
- Threats on retirement: Withdrawal of PF money causes a big dent in the financial security of old age and retirement corpus.
- Mathematics of tax benefit: By taking a home loan, you get double tax exemption, whereas by withdrawing EPF money, this benefit gets limited.
What do EPFO rules say?
As per the existing rules of EPFO, if an employee has completed 5 years of continuous service, he can withdraw money from his EPF account in the following situations:
- To buy land: Maximum 24 months basic salary + DA.
- To buy a ready-made house or flat: Maximum 36 months basic salary + DA.
- On buying a house through a housing society: Up to 90 percent of the total deposited corpus can be withdrawn.
On paper this rule seems very convenient, but from the financial planning point of view it can prove to be quite risky.
4 major disadvantages of withdrawing EPF for home
Financial advisors caution that EPF is a retirement asset, not a liquid savings account. Withdrawing it for any purpose other than emergency situations destroys your old age fund.
- Big disadvantage of compounding: EPF currently offers safe and guaranteed interest at the rate of 8.25%, which is completely tax-free (EEE category). Suppose you are 30 to 35 years old and you withdraw Rs 5 lakh from your PF to buy a house. If this Rs 5 lakh had remained deposited in PF for the next 25 years, then at the time of retirement at the compound interest rate of 8.25%, this amount would have become approximately Rs 36 lakh to Rs 38 lakh. That means the actual value of Rs 5 lakh withdrawn today is equivalent to your loss of more than Rs 37 lakh in future.
- Big gap in retirement corpus: In the Indian perspective, EPF is the only main source for most of the employees for pension or retirement. If you invest a large part of your EPF in real estate in the initial or middle years of your job, you will not have enough cash corpus at the time of retirement.
- Disadvantages of tax benefits of home loan: If you increase the down payment by withdrawing money from EPF and reduce the loan amount, then you will not be able to take full advantage of the tax exemption available on home loan. Under Section 24(b), tax exemption of up to Rs 2 lakh is available annually on home loan interest payments. Under Section 80C, tax exemption up to Rs 1.5 lakh is given on the principal amount of home loan.
- Money gets locked in illiquid assets: By withdrawing EPF money, you convert it into house (immovable property). Real estate is an illiquid asset, which cannot be immediately sold and converted into cash when needed. On the contrary, EPF money comes into your hands immediately in the form of liquid cash upon retirement.
EPF interest vs home loan interest: What is the correct math?
| parameters | EPF corpus | home loan |
| Interest Rate (Annual) | 8.25% (Guaranteed and Secured) | 8.30% to 8.75% |
| tax status | Completely Tax-Free (EEE) | Tax exemption on interest and principal |
| effective cost | gives high returns | After tax exemption, the effective rate comes down to 6.5% – 7% |
After adding tax benefits, the effective cost of home loan comes down to the tax-free interest received from EPF. Therefore, reducing the loan by withdrawing PF money does not make sense even mathematically.
What should be the better options for home purchase?
- Use short-term liquid investments: Use your fixed deposit (FD), recurring deposit (RD), or liquid/debt mutual funds to raise the down payment.
- Extend home loan tenure: Increase the tenure of the home loan by keeping the down payment low in the initial phase and keep pre-paying the loan as your income increases with time.
- Sell non-essential assets: If you have any asset (like an old plot or unused gold) whose returns are not good, then sell it and arrange for down payment.
- Postpone home shopping a bit: If you do not have sufficient down payment, postpone the purchase of home for 1-2 years and create a separate fund for down payment through Systematic Investment Plan (SIP).
Buying a house is a big achievement in life, but putting your old age safety cycle i.e. EPF corpus at stake is not a good financial strategy. Let your EPF money keep growing without any disturbance, so that you do not have to depend on anyone after retirement. Make a separate financial plan for home purchase and establish the right balance between home loan and other savings instruments.
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