EPFO Loan: After purchasing a home, many salaried folks find themselves glancing at their EPF account and home loan statement together, pondering whether it’s a good idea to withdraw EPF funds to clear the entire home loan. While the thought of being free from EMIs is appealing, this choice could negatively impact your financial future. Financial advisors caution that taking out EPF funds to settle a home loan can be quite expensive over time, a reality that many tend to ignore.
EPF is a solid retirement safety net, not just extra cash
EPF is meant for retirement. It’s a mandatory, long-term investment where both the employee and employer contribute, earning around 8.25% interest annually, compounded each year. The best part? The interest is tax-free. This makes it a fantastic, low-risk option for salaried individuals looking to build their wealth. Currently, EPF deposits yield about 8.25% tax-free interest, while home loan interest rates are usually around 7.5%.
At first glance, it might seem like withdrawing EPF funds to pay off a loan is a smart move. But experts argue that this comparison shouldn’t just be about the numbers. EPF funds are a secure investment for your future, and taking them out early can greatly affect your retirement savings down the line.
Pros and cons of EPF withdrawal
Using EPF to pay off your home loan can offer some perks, like instantly lowering your EMI payments or easing a cash flow issue. With the new regulations, if you’ve contributed to your PF for at least 10 years, you can withdraw EPF funds for both the principal and interest of your home loan. However, there are downsides: your retirement savings will take a hit, and you might miss out on the benefits of tax-free compounding.