It’s a better option to take advance EPF than a loan during tough times

The Covid-19 crisis has hit employees and employment across sectors quite severely. With government employees, and private sector employees taking a salary cut, the Employees’ Organisation (EPFO) has relaxed account withdrawal norms to help employees who are facing fund crunch during these tough times. The new non-refundable advance facility introduced by the allows subscribers to withdraw up to 75 per cent of their accumulated corpus or “Basic + DA (dearness allowance)” component up to three-month’s salary, whichever is lower.

The usual advice is that one should not withdraw from their EPF account because it hurts the retirement corpus. Pankaj Mathpal, Founder & Managing Director, Optima Money Managers says, “EPF money is your retirement corpus. By withdrawing it, you are trading your long term well-being for your short-term need and this should be your absolute last resort. Withdrawing from EPF means losing out on EPF’s most significant advantage; the compounding effect.” However, these are extraordinary times, and possibly, one of the worst crisis that most have seen. In times like these, one can consider measures that help reduce unnecessary debt at a low cost. But it is essential that you should be completely clear about the end-use of these funds.

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Retire high-interest credit card: It is the most expensive debt, and revolving credit is an invitation to enter a debt trap. Says Adhil Shetty, CEO “Pay-off high-interest loans, especially credit card dues using this money. The 8.5 per cent annual interest you earn from EPF would be much lower than the credit card interest rate of 18- 42 per cent. Even personal loans cost around 12-20 per cent. You may want to withdraw so that you can prepay this debt in part or full.” Do this especially in case of a sharp salary cut. Else go for a credit card balance transfer, which comes with limited period zero/low-interest rate.

For medical purposes: Medical contingency of yourself or a dependent family member is another legitimate reason for an EPF withdrawal. In times like these, when money is tight for everyone, getting help from friends and family may not be secure.

In case of a job loss: If you have suffered a job loss, it’s going to be very difficult because another job might not be easy to come by in these conditions. Archit Gupta, Founder and CEO — Cleartax says: “In such situations, EPF advance will help them in meeting their expenses. For those who are going through a pay cut, the initial attempt should be to decrease expenses rather than use this money.”

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Of course, there would be many other reasons why you might need liquidity. However, some of them need to be managed by being more frugal. For example: While governments have asked landlords to be considerate about rent for the next three months, some landlords might need it for their own sustenance. In these times, try to adjust the rent against the deposit amount. This might help one tide over for a couple of months.

One can look for cheaper accommodation after that. And if you are lucky, there could be plenty available. Of course, there are other options out there.

While experts have recommended avoiding taking an EMI moratorium, it should be considered in an extreme situation. Gold loan or any secured loan is a good alternative. Shop around for a secured loan which charges an interest lower or on a par with EPF rate of interest.

“EPF delivers one of the higher returns among all fixed income instruments covered under the sovereign guarantee. The scheme also enjoys tax-free returns as well as tax-free maturity, says Shetty.