The home loan moratorium ended on August 31, and borrowers will have to start paying their EMIs on home, car, personal and other loans for the month of September, due in October. For those who have lost their jobs or have had a significant cut in their salaries, the ending of the moratorium is a cause for worry as it would require them to start repaying loans amid inadequate cash flows. While the Supreme Court has directed banks and financial institutions that accounts not declared non-performing assets (NPAs) until August 31 shall not be declared so until further orders, borrowers should be mindful of the fact that the loans have to be repaid and delaying payment will only result in an additional burden.
While liquid funds in the form of fixed deposits are something stressed borrowers would have already considered utilising, dipping into the retirement corpus — employees’ provident fund— which many would have thought unthinkable, too, has started crossing people’s mind.
This week, the Central Board of Trustees of the Employees’ Provident Fund Organisation (EPFO) recommended splitting payment of the interest rate of 8.5% for 2019-20 into two parts.
What is the recent decision on EPF and what does it mean?
Citing “exceptional circumstances arising out of Covid-19”, the EPFO’s Central Board of Trustees has recommended splitting payment of the interest rate of 8.5% recommended for 2019-20 into two parts. The EPFO will credit 8.15% to its over six crore subscribers for the year immediately. The remaining 0.35%, which is linked to its equity investments, will be subject to redemption of its units invested in exchange-traded funds or ETFs “before December 31”.
This effectively means that the retirement fund body is in a position to make only a part-payment of interest, amounting to around Rs 58,000 crore, right now, as per a CBT member. The 0.35% component, or approximately Rs 2,700 crore, will be held over apparently due to liquidity issues.
At 8.5%, the EPF interest rate is at a seven-year low. If the redemption of ETF units does not come through as anticipated, the 8.15% rate would be the lowest since 1977-78, when it was 8%. On March 5, while recommending the 8.5% rate for 2019-20, the Board had made no mention of redemption of ETF units for meeting the payout. The modified interest rate proposal will be now sent to the Finance Ministry for ratification.
Should you withdraw from your EPF?
Irrespective of the changes in interest rates, investors should take their call on withdrawal depending upon their need. Deeply entrenched in investors’ mind as a fund for retirement, it is one corpus that people do not want to touch. Financial planners say that even those who have withdrawn from the fund for various financial needs do not like to talk about it as it somewhere reflects upon one’s financial condition and their inept financial planning.
Financial planners, however, say that individuals must not hesitate to withdraw from EPF if they see that their credit history may be at stake. Pulling out funds from one’s provident fund should not be seen as taboo.
“If you are left with no option and you think your credit history may get impacted because of indiscipline in loan repayment, then you should go for EPF withdrawals,” said Vishal Dhawan, founder and CEO, Plan Ahead Wealth Advisors. Noting that credit history impact is a major item and may impact the borrower’s ability to secure a loan from a financial institution in the future, Dhawan said, “not dipping into retirement money but letting credit history get impacted is not a good idea. Having dipped into the EPF kitty, individuals can later follow a disciplined approach with increased contributions to rebuild it when the finances normalise”.
If the Cibil rating is one consideration borrowers should look at, it is also important to note that if your EPF is earning lower interest income than the interest outgo on your existing loan, it must be utilised to repay the loan at this time. “It is a no-brainer. Any asset earning lower interest than the outgo on loan should be utilised to repay and reduce the debt burden,” said Surya Bhatia, founder of Asset Managers.
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How much can you withdraw and for what purposes?
Before retirement, the EPFO rules permit one to withdraw funds for various reasons. While one can withdraw the full amount if one is unemployed for more than two months, EPFO also permits withdrawal for various purposes including for repayment of home loan principal (up to 90% of EPF corpus), medical emergency, home renovation, wedding, and children’s higher education. For home loan repayment, one is eligible to withdraw if he/ she has completed five years of service.
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What will be the tax liability on withdrawal?
If one has lost one’s job and is withdrawing funds from the provident fund, the tax liability is nil. Also, if one withdraws from PF after five years of continuous employment (including at two different organisations with the EPF balance having been transferred from old to new employer) then there is no tax liability. However, if one withdraws before completion of five years of service, TDS will be deducted at the rate of 10% on the withdrawal.
Why should EPF be the last resort?
It is one saving that one keeps accumulating without realising it. Also, in the current environment, it is the highest return-generating debt instrument.For 2019-20, the rate of interest was fixed at 8.5% and is tax free at all three stages of investment, accumulation and withdrawal. A post-tax interest income of 8.5% means a pre-tax income of 12.4% for someone whose income falls in the 30% marginal tax bracket. By comparison, State Bank of India offers an interest of 5.4% (pre-tax) on a 5-to-10-year fixed deposit. Some small savings schemes of the government come close to EPF in terms of interest income, such as Sukanya Samriddhi Yojana offering an interest of 7.6% (post-tax) and public provident fund that is currently offering 7.1% (post-tax).
Also, under the current circumstances, individuals facing financial stress should understand that the economy may take a little longer to revive and therefore they must cut down their costs as much as possible to avoid additional borrowing.