Why PF Withdrawal is Detrimental When you Buy a House?

Provident fund (PF) is a type of finance which comprises of contributions made by the employee during the time he/she worked along with an equal contribution by his employer. Provident fund is calculated as 12% of his/her basic salary and the same amount is contributed by the employer. However, an employee has the option to contribute more than 12% of his/her basic salary directly towards EPF. Employer’s contribution of 12% of basic salary is entirely deposited in Provident Fund account whereas out of employees’ contribution of 12%, 3.67% is contributed to Provident Fund and 8.33% is deposited in Pension Scheme.

How Does Withdrawing PF Affect Your Retirement Fund?

If contributors withdraw their PF for housing purposes, they will, in turn, have lesser funds during their retirement. However, at least they would have a roof to live under in the future. For now, using PF might make the property affordable, but one never knows what will happen to the property market in the future. Also, there are some places where owning a house would really be difficult if you aren’t that well-off.

If you apply for an employee provident fund account for 5 years, you can avoid tax deduction on the amount you have contributed. But, if the time period of your EPF contribution is less than 5 years and you take out your PF contribution before the completion of 5 years, income tax will be deducted at source.

Making investments affordable in nature

The move to allow withdrawal of PF to finance housing loans is a new one, which would benefit about five million active contributors. Contributors who couldn’t afford a property can now do so with this new withdrawal scheme.

Having excess revenues can be beneficial if contributors are willing to invest in multiple properties. However, things might get tricky as the real estate market is always fluctuating in nature. Those who know how to manage money can use this withdrawal scheme to generate more money for the future. Residents can now utilize such features to accumulate on their assets. However, for those who are financially uninformed, more money equals more trouble. But, this may cause a serious problem in the future if a retiree has inadequate funds to live with.

What can be done instead? How would it be beneficial?

The withdrawal of PF to buy a house 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. So, you must check your PF balance first and then decide wisely.

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. Residents should make sure that they plan in advance before withdrawing their provident funds. If done so, please make sure you don’t use a chunk from the account which might lead to a stressful post-retirement life.

For example, if 60% of the retirement corpus is sufficient to buy or construct a house, you should consume only 10%-20% and opt for an attractive home loan deal to pay the remaining amount as required to buy a house. This will allow the unused portion of the PF balance to accumulate and enable you to lead a comfortable life post-retirement besides having a home.

However, you can avoid paying the interest that comes with a home loan offered by the banks if 20%-30% of the EPF reserves are enough to serve your purpose. Availing a home loan along with PF benefits seems like a safer bet in such critical situations. The latter option would be better as it can reduce the interest liability to a considerable degree.

What is the end result?

Thus, we can conclude that withdrawal of PF would depend a lot on one’s personal needs. So, before you think of withdrawing money calculate your liabilities, expenditure, and savings to be sure that your life after retirement is secure. If you can have both a house and enough funds in PF, it would be great. But if you have less accommodated funds it would be better not to withdraw enough money from PF, or in that case, you may just avoid using your PF at all.

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