Covid advance: Should you draw on your PF account?

On Monday, the Employees’ Provident Fund Organization (RPFO) enabled its more than 5 million subscribers to benefit from a second Covid-19 advance, the second wave of infections having affected families across the country. As members weigh their options, experts say EPF shouldn’t be the default option, but individuals should definitely consider opting out of the fund if they need money or need to pay down debt to preserve their credit rating, or to have an emergency fund in the absence of other sources of funding.

How much in advance can you withdraw?

For the second time in a row, EPFO ​​has enabled subscribers to benefit from a Covid-19 advance. In March last year, the Center announced an online facility allowing members to withdraw an amount not exceeding base salary and cost allowances for three months or up to 75% of the amount credited to them. ‘a member on the EPF account, whichever is less. . This program was notified on March 27, 2020 and the online service launched on March 29. On Monday, the option of a second Covid-19 advance was made available. The government has allowed members who already took advantage of the first Covid-19 advance last year to opt for a second advance.

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Prior to the pandemic period, withdrawal terms allowed policyholders to take a non-refundable advance or withdraw money prior to retirement only for specified purposes, such as a medical emergency, marriage, higher education, or retirement. ‘buying a house, etc.

Also, subscribers unemployed for more than a month can withdraw up to 75% of their balance.

When should you consider diving into your EPF?

Do not forget that EPF earns you a higher interest rate than bank FDs or small savings instruments, and that in 2020-2021, the interest rate offered to members was 8.5 %. This is after-tax interest income and equates to pre-tax interest income of about 12.5% ​​for a person in the top tax bracket of 30%.

Usually, this would be reason enough for an individual to leave the EPF corpus intact until retirement, unless it is to achieve critical goals such as buying a home, raising children or their wedding. However, the last 15 months have been very difficult financially for a number of people.

While on the one hand people have experienced income breakdowns, many have suffered huge medical expenses and in some cases have lost loved ones. These circumstances not only dried up individual savings in many cases, but potentially forced many people to opt for personal loans or other expensive sources of borrowing.

In such circumstances, you should not hesitate to withdraw from your EPF account. It is better to do this rather than borrowing more and going into debt at a time when one is already facing income disruptions and struggling to repay existing debts.

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However, personal finance experts caution that one should only consider withdrawing from EPF after exhausting other options, and that withdrawal should be motivated by need rather than need. access facility. “This shouldn’t be the default option. One should only tap into it if he has exhausted other options such as fixed deposits, debt mutual funds or other small savings vehicles, ”said Vishal Dhawan, Founder and CEO of Plan Ahead Wealth Advisors.

Do you have to withdraw to pay off a debt?

If individuals find it difficult to service their existing debt and have no other source of funds to repay it, experts believe they can withdraw funds from EPF to repay part of the debt in order to pay it off. make it manageable; otherwise, the individual’s credit history could be at stake.

Credit history can affect a borrower’s ability to get a loan from a financial institution in the future, Dhawan observed, noting that it’s not a good idea to leave your credit history behind. be affected. If your Cibil score is a consideration you should consider, it’s also important to note that if your EPF is earning you interest income that is less than the interest spent on your existing loan, then it should be used to pay off the loan.

Should we withdraw for other reasons?

While it may be a good idea to withdraw money from EPF and keep it liquid as an emergency fund if you have no other source of funds left in these uncertain times, you should avoid withdraw it to invest elsewhere.

In an age when stock markets have performed well and mutual funds have seen investors withdraw money to invest directly in stocks, there might be an urge to withdraw EPF money and invest in stocks for higher returns, but experts advise against this. EPF is a key part of asset allocation and individuals should follow a healthy mix of debt and equity asset allocation. If stocks are doing well, that doesn’t mean all money from debt investments should be diverted to stocks. While stocks help generate higher returns, debt provides portfolio stability. And since EPF is a key part of retirement planning, investors should avoid withdrawing money to invest in stocks.

“While there may be a tendency to access ETH money now and invest in stocks, which are doing well, investors shouldn’t. EPF offers a stable return and is not volatile, ”said Dhawan.

How many took advantage of the installation earlier?

As of May 31, 2021, EPFO ​​has settled more than 76.31 lakh of anticipated Covid-19 claims, disbursing a total of Rs 18,698.15 crore, according to a government statement. Until December 31 of last year, EPFO ​​had settled 56.79 lakh requests worth Rs 14,310.21 crore under the advance facility after the Covid-19 pandemic. A total of 197.91 lakhs of final settlements and death, insurance and advance claims worth Rs 73,288 crore were settled from April to December. The exempt institutions, which operate their own PF trusts, also settled 4.19 lakh claims disbursing Rs 3,983 crore.

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