Due to the high price of the properties, it’s impossible for most of the prospective buyers to purchase a flat or house by paying the entire amount upfront. In such situations, buyers turn to banks for home loans for which lenders seek a down payment of up to 20 percent. Arranging this kind of money for down payments can be a tough task for many. Some even think of retreating money from their Employee Provident Fund (EPF) accounts. But is it a wise idea? Let’s see how it works.
As per the new EPFO rules, the subscribers can withdraw 90 percent of EPF accumulations to fund the purchase or construction of house or flat. You can additionally avail the interest payment subsidy on Pradhan Mantri Awas Yojana (PMAY) on the payments made for home buying through EPF. Moreover, to be eligible for withdrawal from EPF account, you must be associated with EPF for at least three years and have at least Rs 20,000 account balance.
Looking at the benefits, it sounds a good option for salaried individuals. But is it really that smart?
EPF is designed to provide a regular income stream for you in retirement. This is designed to meet your income requirements when you are no longer working. Hence, it should not be withdrawn before its maturity as this could jeopardize your retirement. You are exposing yourself to immense risk by leaving no funds to sustain your retirement. Just remember, there are many banks that are willing to give you money to buy a house. But no one lends you cash to live a retired life.
In an EPF account, the employee and employer make an equal contribution towards savings that can be availed on retirement. As the salary increases, your contribution also goes up. This makes a large corpus, provided that you do not withdraw it for any other purpose. Owning a house is a social and psychological need for many of us. Taking such decisions can surely land you in huge trouble and must be avoided at any cost. If you have enough savings, then buying a home is a wise decision rather than using your EPF money for the same. As later on, you may find it difficult to pay for your day-to-day expenses once you retire.
It’s better to make a plan for home buying from the very beginning. Accumulate money for at least down payment and avail home loan after you make the down payment, but do not touch your EPF amount.
The repayment of home loan principal and interest provides attractive tax benefits on a home loan. Under Section 80C of the Income Tax Act, you can avail tax benefits of up to Rs. 1.5 lakh on principal repayment. But, you can avail the benefits only after the construction of your house is complete. You can claim a deduction of up to Rs 2 lakh every year on the interest amount that you have paid on your residential property, as per section 24 of the Income Tax Act. This is applicable for self-occupied properties. You can also claim deductions on a joint home loan and under-construction properties, provided that you meet certain conditions. In most cases, the cost of a home loan is lower than the rate of return received on EPF accounts, which makes the home loan better means to pay for your home.
Hence, it’s advisable that you not withdraw your EPF account. Let your EPF balance compound and help you live a rich retired life.