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Whenever you withdraw PF, you also get the employer’s contribution

LiveMint logoLiveMint 28-02-2017 Surya Bhatia

If I resign before 5 years of service and withdraw the provident fund (PF), will I also get what the employer had contributed? If I don’t withdraw the PF amount, and make no more contributions to it, will I get the amount contributed by the employer upon my retirement?  

—Ankush Porwal

PF withdrawal is taxable if service is not rendered continuously for at least 5 years.

If the recognised PF is transferred to another employer, the new employer’s period of employment is also included to calculate the continuous period.

There are four parts to any PF contribution—employer contribution, interest earned from employer’s contribution, employee’s contribution and interest earned on this.

Leaving the job in any form—resignation, retirement or death—will make the employee eligible for all four parts of the PF.

Just because the period of employment is less than 5 years, it does not mean that you forego the employer’s contribution or the interest earned on it.

But the taxation will be based on the time of quitting employment. If there isn't continuous service of at least 5 years, PF withdrawal is not tax-free. Employer’s contribution and interest on it is taxable as it is clubbed in the hands of employee as salary income.

Employee’s contribution to the extent where the benefit of section 80C, of the Income-tax Act, has been claimed will be taxable as salary income. The tax rate will be applicable as per the specific year’s tax rate and here the relief under section 89 would be available. Likewise, interest component on employee’s contribution will be taxable as income from other sources. 

At the same time you should know that, as of now, a PF account becomes inoperative if there are no contributions in the account for 36 months. And once that happens, the account will not earn interest.

Based on current rules, it is recommended that you withdraw the deposit in the account as it comes closer to the 3-year period, in case there are no more contributions to it, as after that period the account will not earn any interest.

I had taken an interest saver home loan of Rs23 lakh in 2016. Soon, I will have the full balance in my current account. I will not be charged any interest and all my monthly instalments will go towards principal repayment. My property is still under construction. Should I keep the whole loan amount in the bank account and enjoy the interest on it (9.75% variable) or should I invest this money in mutual funds? I am keen to invest in mutual funds from my salary but also want to have liquidity.  

—Hiren

Your loan on house property is a home saver account. This allows you to keep the deposit in the account and the equivalent credit deposit held is reduced from the housing loan amount and the borrower needs to pay interest only on the outstanding amount, else the payment is only on account of the principal outstanding. As you plan to maintain a credit deposit equal to the loan amount, you will not be debited any interest. At the same time, the borrowing costs on the home saver account are a little higher than a regular housing loan. 

There are many takers for the home saver accounts, as the belief is that the interest setoff is convenient and it lets the borrower use the funds more efficiently. Also, it is difficult to get the same or higher interest rate if the funds are invested in another asset class. 

This needs to be compared with two options—first, what if you go for a regular housing loan and invest the surplus, and second, what if you have surplus funds, prepay the loan and with the balance loan, continue paying the EMI (regular monthly instalment) in a regular housing loan. This may not be as easy as it sounds as there are a few variables. 

First, in your case, you need to contact your bank to reduce your interest rate. The loan interest rate typically should be 8.5-8.75% under the new regime of MCLR (marginal cost of funds based lending rate). And in case of home saver, it would be typically higher by 0.5%. 

The critical part is how much you want to keep in the home saver account, as that is the driver if you want to take advantage of this account as well as negate the higher cost of borrowing.

If you are a conservative investor who will invest in debt securities, then the home saver account can work better for you. The returns from investments will not be able to outperform your interest rate comprehensively post-tax. Plus, it gives you the advantage of liquidity.

Investors who are not risk averse aim to earn better than inflation-adjusted returns. In that case it is better to opt for a regular housing loan and invest the surplus for the long term, maybe for the same period as your housing loan. The key is to earn more than your borrowing cost over the long term. The benefits further add up when this borrowing cost is allowed as set off after you get possession or is allowed to be considered as cost of purchase at the time of selling of property.

Surya Bhatia, managing partner, Asset Managers

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