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You cannot draw on provident fund to pay a personal loan

LiveMint logoLiveMint 30-05-2017 Surya Bhatia

I have been working with a multinational company for last 6 years. I want to withdraw some amount from my provident fund to purchase a house. I am taking the home loan jointly with my brother. Can I still withdraw the money? If yes, then how much? Also I want to close my wife’s personal loan. Can I withdraw to pay that loan?

—Nikhil Singh

Employees’ Provident Fund Organisation (EPFO) allows you to withdraw from your provident fund (PF) balance accumulated in your company for specified reasons, subject to some eligibility criteria. The reasons for withdrawal can be marriage, medical treatment, purchase/construction of house, home loan repayment, house renovation, retirement or other reasons like when shifting out of country, retirement including premature retirement. As you plan to either invest in a property or construct or even for repayment of housing loan equated monthly instalment (EMI), you can withdraw the amount as you have already completed 5 years of service. However the amount of withdrawal will be subject to few more restrictions. As you have completed 5 years of service the amount withdrawn will not be subject to TDS, which could have been the case has the service been less than 5 years. However, you cannot withdraw from your PF to service a personal loan. This needs to be paid by your monthly accruals or savings. Try to save every month to pay the EMI and if you could accumulate a little more, target to repay the debt. Also, personal loans are best avoided as they carry high interest rates and represent a case of financial mismanagement.

I had taken a home loan from State Bank of India (SBI) for Rs12 lakh in July 2013 with a condition that I would construct a home within 2 years but I got possession of the plot only on 30 March 2017. I still can’t construct because that area is not developed (there is no water supply or sewage system) and no one is living there. When I went to the bank, they wanted to know the status of construction. I told them I will repay Rs7.5 lakh but they said in that case the interest rate will be increased to 15% from the day the loan was taken. Can they do this? What are my options?

—Darpan Gangwal

A housing loan is a loan taken from a financial institution, including banks, to be used for the purchase or construction of a property. And typically, the interest rates on housing loans are lower than other loans such as loans against property, car loans and personal loans.

In your case, your plan of repaying the housing loan when the housing loan was not used for the construction of house (for whatever reasons), does not construe the loan as a housing loan. Hence, the bank wants to convert the loan to a commercial loan or suchlike, where the interest rate to be paid is higher than the interest rate on a housing loan. And this is when the said loan amount was at your disposal for close to 4 years, for which the bank will ask for an explanation. You need to check the loan agreement for relevant clauses, that is,what are the implications for acts beyond your means: such as, possession came to you only now in March 2017 and then also the developer has not made the place in habitable condition, that is, there is no water supply or sewage connection. In this kind of a scenario, how could you construct the property? You need to check if there are any provisions that safeguard your position.

Is there any chance of the marginal cost of funds based lending rate (MCLR) for SBI coming down? I can wait for this financial year.

—Amit

The MCLR is fixed for a pre-set period. This period can be anywhere from 1 month to 1 year. So once you lock-in an MCLR, you rate gets locked for the determined fixed period and gets reset after the pre-decided interval. The MCLR has four components: marginal cost of funds (the repo rate and other borrowing rates), negative carry on account of cash reserve ratio (CRR), operating costs and tenor premium. All these factors combined together will determine the MCLR. And these rates are quite sensitive to Reserve Bank of India’s policies and hence can change quite fast. You need to keep an active watch to determine the time when you want to reset your rate to MCLR.

Surya Bhatia is managing partner at Asset Managers.

Queries and views at mintmoney@livemint.com

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