Personal Finance

Things to remember when you dip into PF money

Maulik Madhu BL Research Bureau | Updated on October 03, 2021

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While you should have other liquid investments for emergency, knowing withdrawal rules helps

Relatively higher returns than many other fixed income products, a sovereign guarantee backing and friendly tax treatment – make the PPF and EPF hugely popular. Even as market rates are quite low, the government left the interest rate on PPF unchanged in the latest quarterly revision last week. The interest rate has been left unchanged at 7.1 per cent since the June 2020 quarter. Likewise for the EPF – the interest rate on it was retained at 8.5 per cent for FY21, the same as that for FY20.

While from FY22, interest on employee contributions above ₹2.5 lakh into EPF is taxable, this threshold affects only a small population. Net-net, these instruments are unmatched vehicles for someone with a low risk appetite, without having to compromise on returns. However, the long lock-in that these instruments come with, is a negative. A PPF account has to be opened for a minimum of 15 years and can be extended in blocks of 5 years afterwards. As regards the EPF account, most people pretty much contribute to it throughout their work life.

What if you are faced with an emergency and want to dip into these savings? While you should ideally have other liquid investments for emergencies, knowing the rules on withdrawals from the PPF and the EPF help.

PPF

You can make premature partial withdrawals or even close the PPF account prematurely any time after five years from the end of the financial year in which you opened the account. Let’s suppose, you opened a PPF account in January 2017, that is, in FY 2017. Then, you can prematurely withdraw from or close your account only after five years from the end of FY 2017 (31 March 2017), that is, after 31 March 2022 or from FY 2023 onwards.

Premature withdrawal: While a premature withdrawal (unlike account closure) can be done for any reason, it is allowed only up to a certain limit. Your withdrawals cannot exceed the lower of the following - fifty per cent of the balance in your PPF account either at the end of the fourth year preceding the year of withdrawal or at the end of the immediately preceding year. Let’s take an example. If you want to make a withdrawal in August 2022 (FY 2023), then the maximum that you can withdraw is 50 per cent of the account balance as of March-end 2019 (FY 2019- end) or as of March-end 2022 (FY 2022-end), whichever is lower. A withdrawal can be made only once in a financial year.

Premature closure: This can be done only for specific reasons such as treatment of life-threatening disease for the account holder, his spouse or dependent children or parents; for expenses on higher education of the account holder or dependent children in a recognised institute of higher education or change in the residency status of the account holder. Any such a request must be backed by supporting documents.

In case of premature closure, the account will earn one percentage point lower interest than the applicable rate. This will apply for the entire period of the account. Partial withdrawals or a full withdrawal on premature account closure are not taxed.

EPF

In the normal course, you can withdraw your entire accumulated EPF balance on retirement after the age of 55. You are also allowed to withdraw up to 90 per cent of your account balance any time after turning 54 or within one year before your actual retirement, whichever is later.

Premature withdrawal: Premature withdrawal is permitted for reasons such as purchase / construction of a house, acquisition of a site for such construction, additions or substantial alterations to your house and repayment of loans in some cases, subject to certain conditions and limits. To be eligible, you must have held an EPF account for at least five years.

The withdrawal for purchase or construction of a house, for instance, must not exceed - the member's basic salary and dearness allowance (DA) for thirty-six months OR the member's own share of contributions, together with the employer's share of contributions along with the interest OR the total cost of construction, whichever is lower. Withdrawals are also permitted for reasons such as illness in certain cases, marriage and post-matriculation education for your children. For this, you must have held an EPF account for at least 7 years.

Following the Covid outbreak, the EPFO additionally allowed subscribers to avail an advance of up to the limit of basic pay and DA for three months or up to 75 per cent of the EPF account balance, whichever is lower. The two Covid advances were announced in March-20 and May-21.

Premature closure: You can make a full withdrawal and close your account if you have been unemployed for two months since leaving your last job. As long as a complete withdrawal is made only after completing five years of service, there are no tax implications.

Published on October 02, 2021

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