4 things to remember when you repay home loan with provident fund money

Pay attention to the cost of the home loan after adjusting for income tax benefits; EPF subscribers above 50 years of age should avoid using PF meant for retirement to repay the home loan

Kumar Shankar Roy Nov 5, 2019

Home loan repaymentOne of the most common queries we at RupeeIQ receive from readers is: “Should I use my EPF money to repay home loan?”

With the Indian economy in a spot of bother and the grim employment scene, many mid-level employed people are considering paying off their home loan as fast as possible. They seem worried that if they lose their job and are unable to find income replacement soon, the home loan EMI will become an impossible burden.

Since there is a lot of attachment and superstition associated with selling off family jewellery, the only meaningful financial resource for most employed people is Employees’ Provident Fund or EPF. The EPF allows its subscribers to partially withdraw funds, and so readers feel it would be in their interest to settle the home loan quickly. We can understand that nobody wants to lose their cherished home. Without a job and income, paying EMIs is impossible.

Repaying home loan with EPF money may sound simple, but there are various factors one should consider before actually going ahead with it. Read on to know more.

1. Avoid taking the maximum benefit given by EPFO for home loan repayment

For repaying home loan outstanding, the Employees’ Provident Fund Organisation (EPFO) allows the subscriber to withdraw a maximum of 90% of the subscriber’s money. But you should not take 90% of your EPFO money balance to repay the home loan.

Always remember that EPF is for retirement. If you take 90% of your EPF money to repay the home loan, you may become burden-free. But, what will happen when you are retired? Will there be enough money left for you and your spouse?

The EPF interest is paid on the balance in your account. Currently, EPF pays 8.65% interest per year. Whatever amount you take from EPF to repay your home loan, will not any longer earn the interest/return. For instance, if your EPF corpus was Rs 20 lakh and you used Rs 10 lakh for home loan repayment, going forward the EPF interest will be paid on Rs 10 lakh only.

2. Before repaying, calculate the actual cost of the home loan after taking home loan tax benefit

One of the most frequently used arguments given by people who want to repay the home loan with EPF money is that home loan interest rates will remain higher than the EPF interest rate over the future. So, they should repay the home loan, which otherwise will cost them dearer.

Today, banks and NBFCs offer home loans in the 8-9% range. EPF interest rate is 8.65%. If your home loan interest is more than 8.65%, will continuing the home loan servicing through the loan tenure will force you to pay more than you can earn with EPF? Yes and no. This equation is not so simple because income tax benefits for the home loan come into play.

There is a deduction in total income by up to Rs 1.5 lakh for principal repayment under Section 80C of the Income Tax Act. Also, up to Rs 2 lakh for interest payment for a self-occupied property under Section 24 of the Income Tax Act. But, since Section 80C also has insurance, provident fund, and mutual fund investments, most people are unable to get any benefit from the up to Rs 1.5 lakh principal repayment window. Practically speaking, the only tax benefit opportunity left is the Rs 2 lakh interest payment under Section 24. Do bear in mind that if you have a home loan of above Rs 25 lakh, initially the interest paid annually is likely to be more than Rs 2 lakh a year. However, you get the tax benefit only to the tune of Rs 2 lakh.

Hence, you should do the calculations and find out how much tax benefits you are really getting for your home loan. The tax benefits will reduce your home loan interest cost. So, a home loan interest of 8.8% may become 8.5% after adjusting tax benefit. It is also quite possible that by repaying or partly repaying your loan, you do not let go of too much tax benefit.

3. Older individuals should avoid repaying or prepaying home loan balance with EPF

Older individuals, say in their fifties, should try to avoid using EPF balance to repay the home loan. Why? This is because as you grow older, the chances of losing the job are high. Also, it is much more difficult to replenish the EPF balance post home loan repayment since your retirement is just a few years away. Most private sector companies give retirement at 58, while some stretch it till 60.

When you are in your thirties, you still have more than 20 years to retire. In your thirties, you are also not past your career’s prime. You can get promotions, jump jobs and get good increments. But in your fifties, the chances of getting a new job, salary hikes and promotions are much lower. This means it is likely your income growth in the 50s will be flattish.

Such flattish income growth translates to flattish savings growth, which means you will be unable to replenish the hole caused by EPF balance usage for home loan repayment. A younger person can still take the risk of using a portion of their EPF corpus to repay home loan outstanding. But, if you are in the dusk of your income phase, it is better to look at other routes to repay your home loan.

4. If you repay the home loan, save and invest the EMI amount in a proper avenue

You may argue that by repaying your home loan you save on EMI on the home loan principal. Yes, you do save. Also, there will be no home loan repayment burden on your head. But since you have used EPFO money to repay the home loan, ensure that the EMI amount (which you are not paying any more) is invested in a proper avenue.

EPF money is for retirement purposes. The bigger the hole the home loan repayment has caused, the smaller will be your retirement corpus. If you use 50% of your EPF corpus to repay the home loan, your balance EPF corpus is just 50%. Given inflation and old age expenses, do you think you can have a peaceful retirement with just 50% of EPF corpus? The answer is NO.

So, you must save more so that the EPF retirement corpus is quickly refilled. You can save and invest in safe avenues like PPF, small saving schemes, government securities, and bank deposits if you do not want to take the risk.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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