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Avoid withdrawing from your EPF corpus to meet short-term cash needs

If you withdraw, you will completely lose out on future interest

April 15, 2020 / 09:31 AM IST

For decades, Bollywood movies have shown PF (provident fund) withdrawal as a saviour for people during financially challenging times. The salaried are inspired to do so because of the easy access to EPF without any conditions. The Employees’ Provident Fund Organization (EPFO) has processed 1.37 lakh PF withdrawal claims to provide relief to subscribers facing financial difficulty owing to the COVID-19 pandemic. Reports say that more than 4 lakh claims have been received.

Advance withdrawal on EPF

One of the COVID-19 relief measures announced by the government is allowing part withdrawal of up to 75 per cent of the EPF balance or three months of basic salary, whichever is lower. This is a non-refundable withdrawal, which means it cannot be invested back. For example, if an individual has a basic monthly salary of Rs 30,000 per month and has EPF balance of Rs 1 lakh, then a maximum of Rs 75,000 can be withdrawn.

Salary * 3 = 30000*3 = Rs 90,000

75% of EPF Balance  = Rs 75,000

COVID-19 Vaccine

Frequently Asked Questions

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How does a vaccine work?

A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.

How many types of vaccines are there?

There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.

What does it take to develop a vaccine of this kind?

Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.

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Lower of the above  = Rs 75,000

Who is withdrawing?

1.People facing financial difficulties

2.Those who want to use it for expenses or to partially pay off loans

3.Others who wish to invest the money in equities

Should you withdraw?

Irrespective of whether it is for a specific purpose such as home purchase or medical treatment or COVID relief, I would not recommend withdrawing from EPF. This is because the EPF is a long-term financial instrument for securing your retirement. Given that life is so uncertain, it is important to have long-term savings work for you (for old age) and this can happen through the EPF. There is also no other instrument that gives a risk-free, tax-free return with a sovereign guarantee. Withdrawing from the EPF would mean losing out on the biggest advantage the EPF has, which is the compounding effect.

For example, Rs 75,000 withdrawn from EPF by an individual, who has 30 years to retirement, would mean losing out on interest of almost Rs 9 lakhs. A big price to pay indeed. Remember, the movies do not show what happens once the PF withdrawn is used up!

The withdrawal once made cannot be invested back. Unlike the EMI moratorium where you can pay back the outstanding to reduce interest, there is no option to invest back the advance, which means you would be at a disadvantage, as you will completely lose out on future interest.

What do you do when faced with a cash crunch?

Instead of opting for the advance and losing out on so much interest, you could consider selling off physical gold holdings. Most Indian families have large amounts of gold, which are bought for protecting against uncertain times. Many individuals would find this idea preposterous, but gold does not create economic value, is certainly more than 10 per cent of most people’s portfolio and hence should be partially exited to tide through the financially difficult phase. Further, it makes no sense to hold on to assets for emotional reasons and lose out on risk-free, tax-free assured returns. Certainly, those even thinking of withdrawing from the EPF need to also relook at their financial life and devise a strategy to increase savings.

Using the proceeds to repay loans

How come you did not think about using your monthly savings for the same? Just because the EPF corpus has been made easily accessible, you want to use it to pay off loans. Have you thought about how you will manage during retirement? What you are also forgetting is that a significant part of an easy saving (considering that the employer also contributes) is going to be used up and you won’t have much left for retirement. You cannot sacrifice your long-term goals for short term needs. Instead you need to focus on reducing expenses and work on getting savings back on track, by leading a frugal life, even if this means reducing essential expenses.

Equities deliver better returns than EPF

Sure they do. But you cannot do tactical allocation using funds from EPF! You need to have some other savings to be used for tactical allocation. Just as life and health insurance policies are essential, I believe for the salaried, EPF is an essential investment since it provides financial security, which no other instrument does. Managing money is not always about getting the best returns. Whatever the reason, do not take advances from the EPF. Like the lockdown, short-term pain is better than long-term wide spread suffering.

(The writer is financial educator and founder of Finsafe India)
Mrin Agarwal is a financial educator & a licensed financial advisor with an experience of more than 20 years in wealth management industry. She founded Finsafe, a financial education organisation focused on equipping Indians with strategies to handle their money based on goals, growth, and safety. The company has already impacted 30,000 people over the last 5 years of its journey. She also co-founded Womantra, a financial awareness program for women & working professionals to empower them to be truly financially independent. Before dedicating her expertise towards spreading financial literacy in India, she has served in names like Citibank, Deutsche Bank, Birla Sunlife. She has managed a multi-family office for UHNIs and has an extensive experience in investment advisory and banking services.