Salaried people contribute a certain percentage of their salaries to their employee provident fund (EPF) account every month and their employers add 12% to it. An individual is permitted to withdraw the full amount at the time of retirement and partially withdraw during his working life for children’s education, marriage of self, children and siblings, purchase/construction of a house or any medical emergencies.
The option of EPF withdrawal for purchase/construction of a house is available only once in an individual’s entire working life. The minimum service period for this is five years and the maximum amount that can be withdrawn is 36 times the total salary (for construction of property) and 24 times (for purchase of property). Will individuals, however, be able to get the money for building or buying homes if the new budget proposal of tax free withdrawal of 40% at retirement (58 years) and taxing accrued interest on the remaining 60% is finally implemented?
A small percentage (10%) of people making EPF withdrawals to buy real estate or pay off their loans are likely to decide against doing so. Suresh Sadagopan of Ladder 7 Financial Advisories points out that if a certain percentage of population wishes to convert 60% of the corpus on retirement into annuity, they may now have to pay tax to get their own money. If they buy a house or pay off a loan using the EPF amount, they are likely to use only the tax free EPF component and use the remaining sum for pension plans.
People are eligible to withdraw a portion of EPF if they have five years of service. Funds equivalent to 24 months and 36 months of salary can be withdrawn for buying a plot and house/apartment, respectively. Five years of service refers to full five years spent with a single or a total of five years with two companies or more.
Technically, a person can avail of 24 months of EPF for five years or whatever is available in his or her account, whichever is less. For example, if a person’s salary is Rs 20,000 per month, the 12% contribution from the employee is Rs 2,400 and the employer’s contribution works is Rs 1,600 . This means Rs 4,000 per month is the total contribution for the provident fund. The salary for the year works out to be Rs 48,000 and for five years it amounts to Rs 2,40,000. Presuming that the interest accrued on EPF account is Rs 60,000, the corpus after five years in this account will be Rs 3 lakh. The salary for 24 months in this case will work out to be Rs 4.8 lakh but the amount a person can withdraw as per the rule for housing purpose will be only Rs 3 lakh.
The government may come out with a clarification on whether withdrawal of EPF before retirement for a specific purpose will be taxable or not, say tax experts. Also, as per rules introduced last month, if an employee decides to quit and needs to access EPF, he can only withdraw his share and not that of the employer which can only be accessed after 58 years or retirement, whichever is later.
The government has also decided to introduce a transfer amount enabling provision. What this means is that the amount in EPF can be transferred to the National Pension Scheme. For example, if the corpus is Rs 1 crore, 40% withdrawal of the corpus will be tax free but interest earned on the remaining 60% may attract a tax under the new proposal. This can prove to be a deterrent for people wanting to put in their EPF money for real estate.
“Rather than buying real estate, the intention of the government here seems to be to encourage people to move towards buying a pension product. Since life expectancy in India is increasing rapidly and people are living longer, a person does require a pension to help sustain him for at least 20 more years. The premise here is that housing needs are often taken care of during the working life of an individual. EMIs usually begin at age 35 years and end by 50 years of age. Right now people liberally contribute to provident fund, the contribution is almost on auto pilot mode but if a certain portion of interest earned on PF is taxed, people may be forced to deploy their money in other channels, on other productive assets where the return is more than 9%,” say tax experts.
According to Sadagopan, while there is no specific data available on the percentage of the population using EPF money to buy real estate or partially withdrawing the money to pay off their home loan, data available states 10% use the corpus for real estate ‘purposes’ and that too during their working life. Very few use the EPF money to buy their first house post retirement. Having said that, “assuming some people do have a loan liability or requirement to buy a property on retirement, they may choose to make use of retirement proceeds from other sources such as gratuity, bonds, mutual funds, even sell a plot or other real estate or even dig into the tax free 40% PF corpus rather than dig into the remaining 60% provident fund corpus. But a majority of people will still go in for annuities or pension plans rather than real estate.”