Dipping early into PF accounts :: Business Line

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You can withdraw from EPF to buy, construct or repair your house, meet medical, wedding or higher education expenses or repay home loan.

Employees’ provident fund (EPF) and public provident fund (PPF) are among the best investment avenues to build your retirement kitty, thanks to their high safety and superior returns. Currently the tax-free annual return on EPF is 8.25 per cent while it is 8.8 per cent on PPF. Their longer holding periods — EPF matures on your retirement and PPF runs for a minimum of 15 years — ensure that the benefits of compounding are realised optimally too.

But these funds can do more for you. You can withdraw a portion of the accumulated balance in EPF and PPF even before maturity. This will not have any tax liability. Besides, you can borrow against the balance in your PPF account at competitive rates.

CERTAIN LIMITS

From your EPF account, you can withdraw up to certain limits for specified purposes. These include buying, constructing or repairing a house, medical expenses, marriage, higher education and repayment of home loan. But this is only after you have been employed for a specified minimum period.

For instance, you can withdraw a maximum of three times during service for your marriage or that of your children, brothers or sisters. This you can do only after completing 7 years of service.

Also, for this purpose you can withdraw only up to 50 per cent of your share in the EPF account. See table for more details. Also check the link http://www.epfochennai.tn.nic.in/

advances_withdrawls.html.

Documentary evidence will be required while applying for withdrawals. Usually, withdrawals from the EPF account are non-refundable. This means that you need not repay the amount – it is reduced from your EPF balance. No interest is charged on such withdrawals. But if you do not use the funds for the specified purpose, you will be liable to refund the amount and pay penal interest.

END USE

Unlike EPF, there is no restriction on the end-use of funds withdrawn from your PPF account. But withdrawal from PPF can be done only after 5 full financial years after the year the account is opened.

Confused? A financial year runs from April to March. Say you opened the PPF account in November 2002, falling in the financial year April ‘02 to March ‘03. So the first full financial year after this would be 2003-04. Therefore, you can withdraw funds in financial year 2008-09. The maximum amount you can withdraw is the lesser of the following – half the balance at the end of the fourth year prior to the year of withdrawal, or half the balance at the end of the immediate preceding year.

Continuing with the example, say the balance in the PPF account at the end of March ‘05 was Rs 2 lakh and at the end of the March ‘08 it was Rs 3 lakh. In financial year 2008-09 (say in June 2008), you could have withdrawn up to Rs 1 lakh (50 per cent of Rs 2 lakh). You are allowed to withdraw from the PPF only once in a year.

LOAN AGAINST PPF

Loans can be taken against PPF balance between the 3{+r}{+d} and the 6{+t}{+h} financial year from the year in which the account was opened.

Continuing with the above example, since you opened the PPF account in November 2002 , you would have been eligible to take loans between financial years 2005 and 2008 (April 1, 2004 to March 31, 2008).

You can borrow up to 25 per cent of the balance in the PPF account at the end of the second year preceding the year in which you take the loan.

So if the balance in the PPF account at the end of March 2003 was Rs 1 lakh, you could borrowed up to Rs 25,000 in financial year 2005. Borrowings against PPF carry a rate of interest which is 2 percentage points more than what you get on your PPF investment. So currently a loan against PPF will cost you 10.8 per cent annually. You need to repay the loan within 36 months. Else you will be charged interest on the outstanding amount at a rate which is 6 percentage points more than the PPF investment return.

Currently, this will work out to 14.8 per cent annually. People whose EPF accounts are maintained by private trusts and not by the EPFO may have an option to borrow against their EPF balances too.

CAUTION REQUIRED

But do exercise caution. Withdrawing from EPF or PPF erodes your long-term retirement corpus and dilutes the power of compounding. Withdraw only if it is absolutely essential.