Think Twice Before You Make A 'COVID Emergency' EPF Withdrawal

Is it wise to withdraw money from your provident fund to tide over small emergencies during the pandemic?

Employees Provident Fund data raises questions on the creation of jobs or the increased number of employees in formal jobs.

(Photo: PTI)

These are tough times for individuals as the pressure on their finances continues to rise with each passing day. The Employees Provident Fund Organisation (EPFO) has allowed subscribers to withdraw amounts from their balance so as to help them tackle financial emergencies due to the COVID crisis. This has led to a deluge of investors looking to take out their money.

According to data available since April 2020 till the end of July 2020, a sum of nearly Rs 30,000 crore has been withdrawn under the special COVID plus the partial emergency withdrawal window. This is a huge sum and while this might help many people tide over the short term problems, there is a bigger question that the salaried, especially the young, need to think about. Here is your complete guide on the issue.

How Much Can I Withdraw From My EPF Account Under the COVID Emergency Scheme?

A withdrawal from the EPF means that the balance that has been accumulated in the account is taken out by the investor. Normally the amount is not allowed to be accessed before retirement or till there's a change in jobs, but to provide for specific instances there is a provision for partial withdrawal.

Partial withdrawal is possible only for emergencies like a medical emergency, house purchase or construction and higher education.

Due to COVID-19. there is now another provision where an amount, which is either the person's 3 months' basic salary and dearness allowance, or 75 percent of the balance in their account - whichever is lower - is allowed as withdrawal.

This Facility Looks Attractive. Should I Make Use of It?

There are various facilities that are given, but just because this is available to you does not mean that it has to be used. The real benefit of using the facility has to be considered and if this is not beneficial financially, then it has to be avoided. Ideally a retirement investment should not be touched and should be allowed to grow for a longer time duration.

How Does It Matter If I Take Out My Own Money?

Most people think that they are just accessing their own money so it is not a big thing but there is a specific purpose for which the amount is being accumulated. This is meant for retirement and hence taking it out for use at the current point is deviating from the goal. This means that what was planned for retirement will now have a shortfall. The other thing is that the withdrawal action has permanent implications. The provision for taking out the money does not provide for putting it back. So this is not like a loan, where the amount has to be paid back. This translates into a permanent hole as far as retirement planning is concerned.

How Much Will This Impact My Retirement?

When an amount is taken out of a long term investment, the power of compounding is lost. This means that the amount left will grow at a slower amount in absolute terms. It could be years before the previous position is attained. This could mean a far lesser amount available for retirement than before.

Take for example a situation where a person has a Rs 4 lakh balance in the EPF account. Out of this, assume that Rs 1.5 lakh is taken out. If this is done and the annual contribution is around Rs 50,000, it will be another 3 years before the earlier stage of Rs 4 lakh balance is reached.

This difference will continue for life and even if an earning of 7 percent is considered over the next 20 years with the same contribution, the shortage in earnings would be Rs 5.8 lakh or nearly 16 percent of the total final retirement corpus.

In reality the difference will be larger because with increments there will be a higher contribution to the EPF which will increase the difference. The bigger your withdrawal, the bigger the loss of future earnings.

What Should I Ideally Do?

There are several other areas where an individual can look at if they have to search for some funds in the short term.

They can look at their emergency fund or fixed deposits or they can even look at selling some other investment which is not made for the long term. This can help tide over the crisis and more importantly when the amount comes back it can be reinvested and the reduced balance replaced. This is not possible in the case of the EPF so this needs to be considered.

I Have Already Withdrawn Some Money. Now What?

Since the withdrawn amount cannot be put back into the EPF, your goal should be to save the amount taken out as soon as possible. This should then be invested for your retirement goal in some other long term retirement planning instrument which could be either the National Pension System or even some mutual fund. This will help to rectify the hit to the planning and slowly bring things back on track.

(The writer is Founder at Moneyeduschool.)