For salaried employees, Provident Fund (PF) is likely a key part of retirement planning. Built steadily over your working life through monthly contributions, the PF earns guaranteed interest, making it a reliable long-term investment.
However, over the past year, as repo rates have risen, home loan EMIs for many borrowers have become increasingly difficult to manage. With loan tenures stretching into decades, many salaried borrowers may have toyed with the thought of using their PF corpus to repay their home loan.
The idea of fast-tracking your journey to becoming debt-free can be tempting. But whether this is the right move depends on several factors like your age, income, and how close you are to retirement. Let’s take a closer look at what PF rules allow, the pros and cons of using your corpus this way, and when it might make sense to consider this option.
PF is a long-term investment
Using surplus funds to close your home loan sooner is an effective strategy. But your Provident Fund is not a surplus, but a long-term investment meant to sustain you through retirement. Your PF corpus earns interest, currently at the rate of 8.25%, and grows through compounding. Withdrawing from it early can halt the growth of your retirement fund, and should be used as a last resort.
What PF withdrawal rules say?
You can use your PF corpus to buy your first home, make a down payment on a home loan, build a house, or repay an existing home loan, provided you have completed at least five years of service.
The rules allow you to withdraw up to 90% of your PF balance, and even combine it with your spouse’s PF if needed. This can be helpful to reduce your loan EMI, shorten your loan tenure, or eliminate the need for a top-up loan, if the need for one arises.
Taxation
In terms of taxation, PF withdrawals done after five years of service are tax-free. But, if your own annual PF contribution exceeds ₹2.5 lakh, the interest earned on the excess is taxable. However, if your employer doesn’t contribute, the limit is ₹5 lakh.
Before withdrawing, ensure you meet the tax exemption rules. Also consider whether using the money for repaying your home loan will benefit you more than leaving it to grow in your PF account.
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What you lose on withdrawing your PF
Withdrawing your PF to repay a home loan can have long-term consequences. It reduces your retirement savings and, in turn, your financial security in later years. This can be a concern, especially as medical costs and daily living expenses continue to rise. You also lose out on tax-free interest—an advantage that most other investments don’t offer.
Your PF also serves as a financial cushion during emergencies. Many people depend on it as a back-up in case of job loss, illness, or other unexpected events. Tapping into it now means reducing that safety net, which could prove critical in challenging times.
When it might make sense
If you are close to retirement and have a home loan whose interest is higher than your PF interest, using your PF to repay the loan may be helpful. This is especially true if you don’t have any other funds to repay the loan, and doing this can reduce your financial stress later.
But, if you're younger, earning regularly, and can manage your EMIs, it may be wise to leave your PF untouched. Having a solid retirement fund can often provide greater peace of mind over saving a bit on interest today.
Your Provident Fund is a crucial part of your retirement planning and should be treated with that importance. While the rules do permit its use for home loan repayment, it’s wiser to consider other options first, such as gradually increasing your EMIs, starting a repayment-focused SIP, or refinancing your loan. Tap into your PF only when no better alternatives are available.
(The author is the Senior Manager – Communications at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)