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Tata Capital > Blog > Loan for Home > Pros and Cons of Withdrawing from PF for Home Loan Down Payment

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Pros and Cons of Withdrawing from PF for Home Loan Down Payment

Pros and Cons of Withdrawing from PF for Home Loan Down Payment

A Provident Fund (PF) is a government-managed scheme for employees, in which they deposit a part of their salaries periodically. They can withdraw it as a lump sum post-retirement or after the termination of their employment. So, if you are a salaried person arranging funds for a future home purchase, a PF withdrawal for a housing loan down payment makes all the sense! 

However, the process isn’t as straightforward as it sounds. You can only withdraw from the balance in your PF account according to certain conditions and use it to finance a plot or a house, even to repay your home loan!

What is a PF Withdrawal for a Home Purchase?

PF withdrawal for home purchase allows employees to use part of their Provident Fund savings to buy or build a house. Under the rules, you can withdraw PF for property after completing at least five years of service. The amount you can take depends on the purpose. For example, you can withdraw up to 24 months of basic salary plus DA for buying a plot, and up to 36 months for building or buying a ready house.

Moreover, if you are using the provident fund for home purchase, you cannot withdraw more than 90% of your PF balance. You can only use the PF for a house loan if the property is in your name, your spouse’s name, or jointly owned. PF withdrawal for a home loan can be done in instalments. However, the construction must start within six months and finish within the required timeline.

Also, read – What Is Notice of Intimation (NOI) For Home Loans?

Eligibility and Withdrawal Limits for PF Home Loan Withdrawal

To use your Provident Fund for housing, you must meet certain home loan PF withdrawal criteria. You can withdraw PF for buying land, purchasing a new house, constructing a home, or even repaying home loan EMIs. However, you must have completed at least three years of service before applying.

The PF withdrawal limit for a home loan is quite flexible. You can withdraw up to 90% of your total PF balance, depending on the purpose and available funds. But another key PF withdrawal eligibility rule is that the property must be registered in your name, your spouse’s name, or jointly with your spouse.

These provident fund loan rules ensure that only eligible members access the PF for genuine housing needs.

Also, read – Guide on How to Check Home Loan Application Status Online

Is It Good to Withdraw PF for a Home Loan?

Wondering is it good to withdraw PF for a home loan? Withdrawing your PF for a home loan comes with both benefits and drawbacks. Understanding the PF withdrawal pros and cons can help you make a smarter financial decision.

For example, using your PF savings can give you quick funds to reduce your loan amount or monthly EMIs, which is one of the key withdrawing PF for loan benefits. It can also help you buy a home sooner and create long-term stability for your family, adding to the overall PF withdrawal advantages.

However, taking money out of your PF account early reduces your retirement corpus and stops it from growing through compound interest. You may also face tax deductions like TDS, depending on the timing. Plus, since PF withdrawals come with specific rules and limits, they may not suit every borrower. To make the right decision, you can seek PF home loan advice from a financial advisor.

Also, read – Pros And Cons of Home Loan Balance Transfer

Ways to use a PF to finance your home

You can use a PF to arrange the funds for your loan’s down payment in several ways. For each case, you can withdraw only a certain amount of your basic salary and Dearness Allowance (DA) as stated in the table below:

ReasonWithdrawal LimitNo. of years of contribution to PFAdditional terms and conditions
For buying a plot      24 months basic salary and DA  5The maximum amount you can withdraw is the cost of the plot.
For constructing or buying a house36 months basic salary and DA5The maximum amount you can withdraw is the cost of the house. If your house is jointly purchased, the joint-owner should be your spouse and nobody else. If you are building a house, the construction should begin within six months and should be completed within 12 months of the last instalment of withdrawal. If you intend to buy a ready-to-move-in house, the deal for purchase also needs to be completed within six months.

Now that you’re aware of the various regulations governing PF withdrawals, here are some advantages and disadvantages you should consider. 

Pros and cons of withdrawing from your PF account

PF withdrawal for home loan repayment or funding the down payment has both advantages and disadvantages. 

Pros:

  • It helps create assets and security for you because you are using your PF to invest in property. If the percentage increase in the property prices is higher compared to returns generated by the PF, then such a decision can be profitable.

Cons: 

  • If the PF return is higher than the property appreciation rate, it is better to fund the down payment through other modes.
  • The PF provides you security after your retirement, so it is prudent to leave it for that purpose alone and enjoy its long-term benefits.

Steps to Withdraw PF for Home Loan

Wondering how to withdraw PF for a home loan? Once you’ve decided how much PF can be withdrawn for a home loan, follow these steps for a seamless PF withdrawal process:

Step 1: Log in to the EPFO portal using your UAN and password.

Step 2: Go to “Online Services” and open the claim section to begin the request.

Step 3: Select Form 31 and choose “PF Withdrawal” as your claim type. Mention the purpose (home purchase, construction, or loan repayment).

Step 4: Enter basic property details, including ownership, type of purchase, or loan account number.

Step 5: Upload documents, such as the home loan sanction letter or relevant property papers.

Step 6: The last PF loan application step is to submit the request and track it online.

Step 7: The PF withdrawal procedure usually takes 10 to 15 days for approval and payment.

Also, read – What is Khatauni or Khetawni? – Explained in Simple Terms

Alternatives to PF Withdrawal for Home Loan Down Payment

There are several alternatives to PF withdrawal if you want to arrange your home loan down payment without touching your retirement savings. For example, you can consider PF withdrawal substitutes like:

1. Loan Against Fixed Deposit or Mutual Funds: These loans have lower interest rates because they are 

backed by your investments, making them a practical choice for funding a home loan without PF withdrawal.

2. Personal Loans: Other home loan down payment options include getting a personal loan. They are quick to get and don’t require collateral, making them useful when you need money urgently. However, the interest rates may be higher.

Also, read – Understanding the Down Payment for a Home Loan

Tax Implications of Withdrawing PF for Home Purchase

When you take money out of your PF for buying a home, the PF withdrawal tax depends on how long you have worked and what portion of the fund you withdraw. While your own PF contribution is not taxed, the interest earned on it is taxed as “income from other sources.” Your employer’s contribution and the interest on it are fully taxable and counted under salary income, which affects the PF withdrawal tax impact.

Moreover, if you withdraw before 5 years of continuous service, the entire amount becomes taxable. No TDS is cut if the amount is below Rs. 50,000. After 5 years of service, tax on PF home loan withdrawal does not apply. According to PF withdrawal tax rules, TDS is 10% (or 20% without PAN) unless you submit Form 15G/15H.

In summary

PF withdrawal for a home loan can be a quick way to acquire funds, but it should be used only when extremely necessary.

Are you looking for a quick and easy way to finance your property purchase? Turn to Tata Capital. We offer housing loans at affordable home loan interest rates and flexible repayment options. While you’re at it, use our handy home loan EMI calculator to estimate the EMI value before you apply.

Take a step closer to your dream home and apply today!

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FAQs

What documents are required to withdraw PF for a home purchase?

 

To withdraw PF for home purchase, you need to submit the sale agreement, owner declaration, bank details, and ID proof. You may also have to upload a filled Form 31 and any payment or construction-related documents requested by the EPFO.

Can jointly owned properties qualify for PF withdrawal?

 

Yes. You can withdraw PF if the house or land is owned by you, your spouse, or both jointly. The property must be registered in one of these names for the withdrawal to be approved.

Does withdrawing PF impact retirement benefits?

 

Yes. Withdrawing PF reduces your total retirement savings and the interest you would have earned over time, which may lower your financial security after retirement.

Are PF withdrawals for a home loan taxable?

 

Tax applies if you withdraw PF before completing 5 years of continuous service. After 5 years, the withdrawal is tax-free. TDS may be deducted based on the amount withdrawn and whether your PAN is provided.

What alternatives exist to PF withdrawal for home purchase?

 

You can consider a loan against fixed deposits, a loan against mutual funds, or even a personal loan as an alternative to a PF withdrawal for home purchase. These options help you arrange funds without reducing your long-term PF savings.

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