Buying a house, although being a remarkable milestone in one’s lifetime, is an expensive affair. Even if you find affordable deals with low home loan interest rates, you will still need to deposit a lump sum amount as the down payment. Paying such a high sum of money in a lump sum can be hard. This is why many use their Employee Provident Fund (EPF) money to cover the cost of the home loan down payment.
How can you use the EPF money for a home loan down payment?
As per Section 68B of the Employees’ Provident Funds Scheme, 1952, you can use your EPF money to purchase a house or cover its construction cost. If you purchase a ready-to-move-in house or construction, you can withdraw up to 36 months of your basic salary along with Dearness Allowance (DA) or up to the cost of the plot. If you purchase a plot for the purpose of construction, you can withdraw up to 24 months of your basic salary and DA.
In addition to this, only employees who have a minimum of 5 years of service can withdraw funds from their EPF. The total withdrawal can also not be more than 90% of the EPF balance.
Is withdrawing funds from your EPF for a home loan down payment a good idea?
Withdrawing funds from your EPF can have certain benefits as well as disadvantages:
Advantages of using EPF for a home loan:
- You can get easy access to a lump sum amount.
- You do not have to liquidate other savings.
- You can reduce the home loan amount by paying a high down payment and subsequently get lower home loan interest rates and EMIs.
- If the withdrawal is made after the completion of 5 years of continuous years of service, there is no tax charged.
Disadvantages of using EPF for a home loan:
- You may fall behind on your retirement goals. If you are not able to make up for the withdrawn amount in time, you could lack funds in retirement.
- Interest earned on EPF contributions over Rs. 2,50,00 are taxed as income from other sources if both the employer and employee are contributing to the plan. If the employee is the sole contributor, the limit is increased to Rs. 5,00,000.
To sum it up
You can use a home loan EMI calculator to determine your loan requirements and see if you need to withdraw funds from your EPF or not. Remember that while EPF can be a suitable option to make the home loan down payment, you must have other retirement savings and investments in place. If EPF is your only retirement account, using it may cause financial troubles later.