Provident fund scheme is a close-ended one with a lock-in period of 15 years. So, the moment you are asked to invest in PF, the picture of money locked in a closet looms over the mind. However, there are certain provisions made for the investors so that they can enjoy their savings made through provident fund even before the end of the term of 16 years of investing. Very few people know that the amount saved in provident fund can be used to make property purchase. Let’s understand how this works. Provident fund to purchase a property is one of the options to get your home dreams fulfilled.
To begin with let’s try to understand the different types of provident funds. You must have come across the term EPF when you started working. The EPF (employees provident fund) is the account operated by Employee Provident Fund Organization (EPFO) in India. In this account, the employee deposits a fraction of the salary (12% presently) and the same amount is contributed by the employer. It is quite different from PPF (Public Provident Fund).
PPF or public provident fund is a savings cum tax savings account opened in the branches of State Bank of India. Listed here are the main points of difference between the EPF and PPF:
- EPF is meant only for salaried employees, while PPF account can belong even to a minor.
- The term of EPF ends with the term for which you work for your employer. You can ask the EPF amount to be withdrawn and get the account closed as soon as you part ways with your organization. The amount lying in PPF, on the other hand, cannot be withdrawn prematurely. The depositor can ask for loan from the bank on the basis of amount deposited in PPF (more about it in the next section).
- The interest received on PPF is tax-free, while the earnings in the form of interest of employees provident fund are taxable.
Public Provident Fund to Purchase a Property
Though there is a lock-in period of 15 years when you choose to invest in public provident fund scheme, you can still use the money by the way of availing loan after the completion of five years of contributing. The money can be used to buy property of constructed type, and also for constructing the property. You can also take loan from provident fund if your spouse owns the plot solely or jointly with you.
How much loan you can take under the provident fund scheme depends upon the purpose. For example, if the loan is availed to buy property such as loan, the amount equal to two years basic salary plus dearness allowance, but to the maximum of the PF amount accumulated at the time of applying for the loan.
For the purchase of a constructed house or for construction, the amount of loan equals the three years’ salary plus the dearness amount, again to the maximum of PF amount accumulated only. Any of the lower of cost of the property and PF amount accumulated is granted as home loan.
In addition to constructing the home for the first time, or buying a constructed property, one can also withdraw money from PF for improving an existing property. This property need not be the same for which the loan for construction or purchase was taken. The property to be constructed can belong to the spouse too or can be held jointly by husband and wife.
Conditions for withdrawing money from provident fund scheme
You can withdraw money from provident fund, if the construction of the house is to start immediately or within six months of the withdrawal. The completion also has to be done within 12 months. Similarly, for the purchasing purpose, the property purchase has to be made within 12 months from the date of withdrawing the money. Any two withdrawals from the provident fund account should take place ten years apart. So, once you have taken the home loan from provident fund to purchase a property, next withdrawal for the purpose of improvement can be made only after the completion of ten years from the date of the first withdrawal, subject to availability of the amount in PF. In case of withdrawing money for improving the constructed property, five years should have passed from the date of completion of construction.
PF amount can be used for repayment of home loan too!
If you are a home loan borrower and need a support to repay it, you can surely take a look at your provident fund account. The withdrawal from provident fund scheme is also possible if you want to use it for the repayment of home loan taken by you or your spouse or jointly together. The amount equal to three years’ salary and dearness allowance, maximum to the total amount accumulated in PF (minus what is required to retain the account) can be withdrawn for the payment. The entity need not be individual only to avail this facility. The withdrawals can be made by public recognized entities too, such as, registered non-cooperative societies, municipal corporation, governments and state governments, and any other development authority, but solely for the purpose of house.
Important rules of PPF withdrawal
How much amount can be withdrawn from PPF account? Well, there are certain rules that determine the upper cap of the withdrawal amount.
- As mentioned earlier, the PPF account cannot be touched before the completion of five years of contributing to it. The amount eligible for withdrawal is 50% of the closing balance at the start of the 5th year of contribution. Say, by the end of 4th year, if the PPF balance is 1 lakh, then only 50,000 can be withdrawn on the completion of fifth year. Likewise, in years beyond five years, the closing balance used for computing will be the amount accumulated at the end of the previous year.
- Only that amount of loan is permissible which falls within the withdrawal limit of the PPF account.
- You can withdraw only once in the financial year from the PPF account.
- The second loan from PPF account is sanctioned only when the first loan is repaid in full.
Rules for withdrawing amount from EPF account
If you are a salaried employee, you become a member of EPF scheme and invest a fraction of salary in this account till you maintain working relationship with your employer. EPFO (employee provident fund organization) also has provisions for helping its members who want to purchase property. These rules are:
- 90% of the amount of EPF account can be withdrawn for the purpose of buying a house.
- In case the construction cost comes out to be less than amount withdrawn, or if the property is not allotted due to any reason, there is the provision of re-depositing the withdrawn amount back to the account within a month.
- The EPF amount can also be withdrawn for the repayment of loan. There is a certain form, Annexure I, available for the purpose in which all details pertaining to loan are asked to be filled by the borrower repaying the loan.
- Once the repaying is done, the Annexure II is issued to provide the details of the amount remaining in the EPF and the next payments made in this account.
- Annexure III is to be filled to authorize the EPF account manager to pay EMI of home loan using the amount accumulated in the account. This annexure is to be filled along with Annexure I.
- The EPFO is not liable to pay EMI or any related dues once the member leaves the organization and closes the account.
Forms applicable for withdrawing amount from PPF account
Form C is provided in SBI for placing request of partial withdrawal from PPF account. One has to mention the start date of the enrolment to PPF and account number to withdraw the permissible amount. Apart from SBI, there are 22 other banks offering the option of PPF account. You can open PPF account in any of their PPF branch and do formalities of withdrawing money from it to buy property according to the stipulated terms.
Which is better – using PF to buy house or taking a home loan?
Using provident fund to purchase a property makes sense if the amount accumulated is huge and the liability towards house purchase is small. This situation works two ways in the property buyer’s favor. He has ample amount left in the name of retirement savings. And, he is not forced to pay hefty interest that comes with the home loan.
But, consuming the whole of (EPF) provident fund to purchase a property is not a good idea. The person is eventually left with nil savings post retirement.
Thus, the use of combination of PF and home loan can be considered for landing upon a profitable situation. In this situation, you continue to enjoy tax benefits on home loan repayment and also reduce the liability sooner, reducing the overall cost of the property in the process. Hence, wisely using provident fund to purchase a property can lead to overall profitability.