Covid advance: Should you dip into your PF account?

For the second time in successive years, the EPFO allowed subscribers to avail a Covid-19 advance.

On Monday, the Employees’ Provident Fund Organisation (RPFO) allowed its over 5 crore subscribers to avail a second Covid-19 advance, with the second wave of infections having impacted families across the country. As members weigh their options, experts say EPF should not be the default option but individuals should definitely consider withdrawing from the fund if they are in need of money or need to repay a debt to preserve their credit score, or to have an emergency fund in the absence of other sources of funds.

How much advance can you withdraw?

For the second time in successive years, the EPFO allowed subscribers to avail a Covid-19 advance. In March last year, the Centre announced an online facility to allow members to withdraw an amount not exceeding the basic wages and dearness allowances for three months or up to 75% of the amount standing to a member’s credit in the EPF account, whichever is less. That scheme was notified on March 27, 2020 and the online facility launched on March 29. On Monday, the option of a second Covid-19 advance was made available. The government has permitted members who already availed the first Covid-19 advance last year, to opt for a second advance.

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Prior to the pandemic period, withdrawal conditions allowed subscribers to take a non-refundable advance or withdraw money before retirement only for specified purposes, such as a medical emergency, marriage, higher education or purchase of a house, etc.

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

When should you consider dipping into your EPF?

One must remember that EPF earns you a higher interest rate in comparison to bank FDs or small savings instruments, and in 2020-21 the interest rate offered to members was 8.5%. This is post-tax interest income and is equivalent to pre-tax interest income of around 12.5% for someone in the highest tax bracket of 30%.

Usually, this would be enough reason for an individual to leave the EPF corpus untouched until retirement, unless it is for meeting critical goals such as home purchase, children’s education or their wedding. However, the last 15 months have been financially very challenging for a number of individuals.

If on the one hand people have seen disruptions in income, many have suffered huge medical expenses and, in some cases, have lost their near ones. These circumstances have not only dried individual savings in a lot of cases but have potentially forced many people to go for either a personal loan or other expensive sources of borrowing.

In such circumstances, one should not hesitate to withdraw from one’s EPF account. It is better to do that rather than go for additional borrowing and pile on debt at a time when one is already facing disruptions in income and struggling to service their existing debts.

Personal finance experts, however, caution that one should only consider withdrawal from EPF after having exhausted other options, and withdrawal should be driven by need rather than ease of access. “It should not be the default option. One should only dip into it only if he/ she has dried up other options such as fixed deposits, debt mutual funds or other small savings instruments,” said Vishal Dhawan, founder and CEO, Plan Ahead Wealth Advisors.

Should you withdraw to repay debt?

If individuals are finding it tough to service their existing debt and have no other source of funds to repay it, experts feel they can withdraw funds from EPF to repay some of the debt in order to make it manageable; otherwise, the credit history of the individual could be at stake.

Credit history may impact the borrower’s ability to secure a loan from a financial institution in the future, Dhawan observed, stressing that it is not a good idea to let your credit history get impacted. If your Cibil rating is one consideration that you should look at, it is also important to note that if your EPF is earning you lower interest income than the interest outgo on your existing loan, then it must be utilised to repay the loan.

Should you withdraw for other reasons?

While it may be a decent idea to withdraw some 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 must avoid pulling it out for investing elsewhere.

At a time when equity markets have done well and mutual funds have seen investors pulling out money to invest directly in stocks, there could be an urge to pull EPF money out and invest in stocks for higher returns, but experts advise against this. EPF is a key element of asset allocation and individuals should follow a healthy mix of debt and equity asset allocation. If equities are doing well, it doesn’t mean all the money from debt investments should be diverted into equities. While equities help generate higher return, debt provides stability to the portfolio. And since EPF is a key component of retirement planning, investors should avoid pulling money out to invest in equities.

“While there could be a tendency to access the EPF money now and invest in equities, which are doing well, investors should not do that. EPF provides stable return and is not volatile,” said Dhawan.

How many availed the facility earlier?

As on May 31, 2021, the EPFO settled more than 76.31 lakh Covid-19 advance claims, disbursing a total of Rs 18,698.15 crore, a government statement said. Until December 31 last year, the EPFO had settled 56.79 lakh claims worth Rs 14,310.21 crore under the advance facility after the Covid-19 pandemic. A total of 197.91 lakh final settlements, and death, insurance and advance claims worth Rs 73,288 crore were settled during April-December. Exempted establishments, which run their own PF trusts, also settled 4.19 lakh claims disbursing Rs 3,983 crore.

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