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Should you withdraw from your EPF to buy a house?

Posted on 21 Apr 2024
Author: Sayan Sircar

Tags: House Purchase

10 mins read
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This article explains what happens if you withdraw from your EPF to buy a house and who should or shouldn’t withdraw from EPF for this reason.

Should you withdraw from your EPF to buy a house?

📚 Topics covered:

Why should you withdraw from EPF to buy a house?
What are the conditions for EPF withdrawal for purchasing a house?
Can you pay off your home loan via EPF withdrawal?
What is the impact on your portfolio if you withdraw EPF like this?
Who should do this EPF withdrawal?
Who shouldn’t do this EPF withdrawal?
What happens if your home loan rate is lower than the EPF rate?

Why should you withdraw from EPF to buy a house?

Employees’ Provident Fund (EPF) is a mandatory retirement investment applicable to all salaried investors. However, you can withdraw from your EPF to purchase or build a residential property.

EPF offers a guaranteed and mostly tax-free 8.25%/year while home loans have a higher interest rate. Prepaying a home loan, or not withdrawing from higher return equity corpus when buying a house can be a good reason for liquidation of EPF.

A somewhat extreme example, to understand how the interest rate dynamics work, is the rationale that you must pay off higher interest rate loans before investing. For example, a credit card balance, at 42%, requires you to pay more than 40,000/year for ₹1 lakh outstanding balance. If you have ₹1 lakh with you today, then there is no other investment that can give you higher returns than that consistently year after year. So you must pay off the credit card loan.

The same logic applies here. Home loans have a higher interest rate than EPF. Also, you can have other investments that are currently giving good returns that you don’t want to touch. An EPF withdrawal, which is allowed only under special circumstances, can be a good option.

What are the conditions for EPF withdrawal for purchasing a house?

Withdrawal Limit: You can withdraw up to 90% of your EPF balance
Service Period: A minimum of five years of service is required to be eligible for PF withdrawal
Ownership: You, your spouse, or both must jointly own the new house
Instalments: PF withdrawal can be done in instalments. Construction should start within six months of the first withdrawal and be completed within 12 months of the last instalment
Property Transaction: If you use a PF withdrawal to buy a house, the property deal should be completed within six months from the date of the online PF withdrawal
One-time Use: PF withdrawal for housing is permitted only once in a lifetime

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Can you pay off your home loan via EPF withdrawal?

EPF withdrawal, under the conditions above, can be used to pay off a home loan, in part or in full. Please do not withdraw more from your EPF than what is needed for the home loan payoff.

What is the impact on your portfolio if you withdraw EPF like this?

EPF being a retirement investment, should be withdrawn only if you really need the money. Or you understand the exact impact on your portfolio due to the withdrawal. To make a robust case for EPF withdrawal, we will

withdraw ₹10 lakhs from EPF
pay off ₹10 lakhs of home loan
invest the EMI of that ₹10 lakh home loan in equity mutual funds for 15 years

Using data from the EPF India website, we plot the historical interest rates of EPF since 1952.

EPF Interest Rate History

Some observations:

EPF rates before the 1980s were below the levels of today
will EPF rates go lower from the current levels: history shows us that it has been a lot lower, and there is no reason why it cannot go a lot lower
there was a long period of 15-ish years (1985 to 2000) where interest rates were their highest, i.e. 10-12%. If you have a longing for those rates, do remember the condition of the economy in the same period
EPF investment is capped at 12% of basic (plus DA) with an equal match from the employer per year
employees can invest more than this cap per year via the Voluntary Provident Fund (VPF) which has the same interest rate

SENSEX vs EPF yearly returns since 1979

Yearly SENSEX returns have been quite volatile but EPF, but even with regular changes, the EPF rate has been quite stable.

We are following the same methodology as our previous article on PPF vs mutual funds here: PPF vs. mutual funds: which is better?. The key difference between PPF and EPF is that while PPF is an optional investment open to all investors whether salaried or not, the EPF is open only to salaried employees but is mandatory for most salaried employees:

we use historical interest rates and annual limits of EPF from 1952 till date, along with Sensex data from 1979
SENSEX data is the price index from 1979 to 1996 and then onwards it is the SENSEX Total Return Index (TRI) which includes dividends
we run a 15-year or 180-month simulation multiple times: from Mar-1979 to Mar-1994, Apr-1979 to Apr-1994 and so on
home loan rates are assumed to be 1.5% higher than the EPF rate

These are all rolling-returns and show a strong trend that can help you make a decision.

Result of EPF withdrawal and investment in mutual fund for 15 years

Sensex vs EPF - 15 years of investing after EPF withdrawal

Only during post 2000 market fall has EPF withdrawal been a bad option. For all other periods, withdrawal has been a better option. The XIRR chart below shows the same result.

Sensex vs EPF - XIRR of 15 years of investing after EPF withdrawal

Result of EPF withdrawal and investment in mutual fund for 20 years

Sensex vs EPF - 20 years of investing after EPF withdrawal

We see that in all situations, the mutual fund portolio has given better results.

Sensex vs EPF - XIRR of 20 years of investing after EPF withdrawal

Result of EPF withdrawal and investment in mutual fund for 25 years

Sensex vs EPF - 25 years of investing after EPF withdrawal

As the time period increases, the trend is now stronger in favour of EPF withdrawal.

Sensex vs EPF - XIRR of 25 years of investing after EPF withdrawal

These results show, quite unambiguously, that a SIP in SENSEX, using the home loan EMI saved by EPF withdrawal, has worked out well in the past, especially for long time horizons.

Who should do this EPF withdrawal?

We will lay down some thumb rules to understand if EPF withdrawal is the right thing for your situation:

your home loan is expected to run for 15 years or longer. Shorter periods of equity investment can lead to losses
you have the discipline to invest the saved monthly EMI for your long-term goals
you have a financial plan in place which says that you have an excessive allocation to debt assets (PPF, EPF, NPS) that you cannot rebalance into equity since that is locked until retirement
if you don’t have the downpayment saved up but getting a very good real estate deal
if you have an overdraft loan account with SBI (Maxgain) for example, parking the EPF money in that account will save interest but preserve liquidity

To understand if EPF withdrawal is the right decision for you:

Who shouldn’t do this EPF withdrawal?

EPF withdrawal for house purchase does not make sense if:

this is not your residential house. The EPF rate, which is guaranteed (currently offering 8.25%/year), and tax-free for the most part, is high enough that it is hard to justify against the expected from real estate
you don’t have a substantial retirement corpus in place already
you have a good amount of equity or similar risky assets in your portfolio. Increasing equity exposure further does not make sense

What happens if your home loan rate is lower than the EPF rate?

If your home loan rate dips below the EPF rate, which was the case for floating-rate loans before COVID-19-related interest rate hikes, the benefit reverses. Since you cannot put a large sum of money back into EPF, you will be in a net loss situation.

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