If you withdraw, you will completely lose out on future interest
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has a basic monthly salary of Rs 30,000 per month and has EPF balance of Rs 1 lakh, then a maximum of Rs 75,000 can be withdrawn.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
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For example, Rs 75,000 withdrawn from EPF by an individual, who has 30 years to retirement, would mean losing out on interest of almost Rs 9 lakhs.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 Remember, the movies do not show what happens once the PF withdrawn is used up!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)