How partial withdrawal from EPF, NPS during financial emergency can hurt

Stringent rules have been put to ensure that this practice is discouraged

Whenever a major financial emergency arises, there is a strong tendency to dip into one's retirement savings. This should be avoided. In old age, income from profession, job or business decline, and one has to live off one's savings and investments. With joint families splintering into nuclear ones, that age-old support system has also vanished. It is to prevent people from using up their savings prematurely that the rules for partial withdrawal for retirement-oriented products have been kept fairly stringent.

Experts suggest extreme caution when deciding to use one's retirement savings to finance other goals. “Your retirement savings act as the life jacket at a time when all other sources of income have ended. They are extremely important for leading a comfortable retired life,” says Vijay Kuppa, co-founder, Orowealth.

Key retirement products: The most important retirement product for employees is Employees’ Provident Fund (EPF). Both the employer and the employee contribute 12 per cent of the basic salary plus dearness allowance to it. EPF currently offers a return of 8.5 per cent. If an employee works for more than five years, the corpus becomes tax-free at maturity. 

Instruments like National Pension System (NPS) and Public Provident Fund (PPF) are also available to the self-employed as well. NPS is a market-linked product where you can allocate money to four types of funds: equity, corporate bond, government bond, and alternative investment. PPF is a fixed-income option with sovereign guarantee. It has a tenure of 15 years, which can be extended in blocks of five years. The current interest rate is 7.9 per cent, which is also subject to review. The corpus received on maturity is tax-free.

Stringent rules for partial withdrawal: Partial withdrawals can be made from EPF for marriage or education, purchase or construction of a house, purchase of land, home renovation, repayment of home loan, etc. The maximum limit on partial withdrawal varies, depending on the purpose. Partial withdrawal is tax-free if the EPF account has been held for five continuous years. 

Partial withdrawal from NPS is also allowed only in specific situations: for children's higher education and marriage, purchase or construction of residence, treatment of a specified list of critical illnesses, to meet the expense of self-development, and to establish one's own venture. Partial withdrawal can be done only if the account is at least three years old. This rule is waived if partial withdrawal is for skill development. The cap on partial withdrawal from a tier-I account is 25 per cent of the account holder's contribution (not of the total corpus). Only three such withdrawals are allowed during the entire tenure. The maximum 25 per cent partial withdrawal allowed is tax-exempt.

A PPF account holder can make one partial withdrawal each year from the seventh year (that is, on completion of six years). The withdrawal amount is limited to 50 per cent of the total balance at the end of the fourth year immediately preceding the year of withdrawal, or the year immediately preceding the year of withdrawal, whichever is lower. 

Experts say one should avoid dipping into one's retirement corpus for other goals like building a house or children's education. "In this era of nuclear families and absence of Social Security, the only thing you can fall back on is your savings for leading a dignified life in retirement," says Omkeshwar Singh, head–RankMF, Samco Securities. Santosh Joseph, founder and managing partner, Germinate Wealth Solutions, also suggests caution. "Using your retirement savings to finance other goals is an extremely sensitive and important issue. Explore all other options before dipping into your retirement savings," he says.