Should I Withdraw Provident Fund to Prepay Home Loan?

[ashishgupta09]

I currently have a home loan outstanding of ₹36 lakh out of the total ₹55 lakh. The interest rate on the loan is 8.5%. I've been considering withdrawing money from my Provident Fund (PF) to prepay a large portion of this home loan.
From a pure mathematical standpoint, prepaying the loan could potentially save me a significant amount of interest costs over the remaining tenure. At 8.5% interest, the overall interest outgo on the outstanding ₹35 lakh would be quite high.

However, withdrawing PF has its own implications:

• Tax Implications: PF withdrawals are taxable, so a substantial portion of the withdrawn amount may go towards paying income tax.
• Loss of Tax Benefits: PF contributions qualify for tax deductions under Section 80C. Withdrawing the corpus would mean losing out on this tax benefit for the corresponding number of years.
• Opportunity Cost: The PF corpus grows tax-free, benefiting from compounding. Withdrawing it means losing out on this growth potential.
• Contingency Fund: The PF acts as a contingency fund for retirement. Withdrawing it could impact my retirement planning.

So while prepaying the home loan could provide relief from the high interest burden, it's crucial to evaluate the opportunity cost and tax implications of withdrawing PF.

I'd appreciate insights from others who may have been in a similar situation. What were the key factors you considered while deciding whether to withdraw PF for prepaying loans?
Any advice on optimizing this decision would be invaluable.

 

[ShavirB]

You forgot to consider tax benefits from Home Loan under Section 80C and Section 24(B). If you consider that your net outflow for Home Loan Payment would reduce a bit

 

[ashishgupta09]

Thanks Shavir. Good call out for considering the tax benefit under 24(B), but Home loans contribution to 80C is almost nil. 80C gets exhaused with school fees itself.
However, even after considering 24(B) if it adviable to keep paying the interest to the bank, when you can actually increase your VPF & PPF contributions once you are out of EMI burden?

 

[ShavirB]

Since most of your interest is paid in the initial half of your loan prepayment, I would advise you to avail the Section 24(B) tax benefits. This will significantly bring down the Effective Rate of Home Loan - If you're in the 30% tax bracket, your effective rate after availing tax benefit would be ~6.5%.

With PF you get tax adjusted returns of 8.5% and your net outgo with Home Loan is ~6.5%. Clear delta of +2%.

Once you've paid most of the Interest on Home Loan, you can revisit this decision.

 

[ashishgupta09]

That's an awesome viewpoint.
Thanks for that, @ShavirB

 

[zacobite]

I currently have a home loan outstanding of ₹36 lakh out of the total ₹55 lakh. The interest rate on the loan is 8.5%. I've been considering withdrawing money from my Provident Fund (PF) to prepay a large portion of this home loan.
From a pure mathematical standpoint, prepaying the loan could potentially save me a significant amount of interest costs over the remaining tenure. At 8.5% interest, the overall interest outgo on the outstanding ₹35 lakh would be quite high.

However, withdrawing PF has its own implications:

• Tax Implications: PF withdrawals are taxable, so a substantial portion of the withdrawn amount may go towards paying income tax.
• Loss of Tax Benefits: PF contributions qualify for tax deductions under Section 80C. Withdrawing the corpus would mean losing out on this tax benefit for the corresponding number of years.
• Opportunity Cost: The PF corpus grows tax-free, benefiting from compounding. Withdrawing it means losing out on this growth potential.
• Contingency Fund: The PF acts as a contingency fund for retirement. Withdrawing it could impact my retirement planning.

So while prepaying the home loan could provide relief from the high interest burden, it's crucial to evaluate the opportunity cost and tax implications of withdrawing PF.

I'd appreciate insights from others who may have been in a similar situation. What were the key factors you considered while deciding whether to withdraw PF for prepaying loans?
Any advice on optimizing this decision would be invaluable.

Pls don't.. HL & PF have tax benefits.. technically u earn 8.25 ( tax free) and HL os reducing rate the cheapest loan u can get.. if u are not under any pressure.. dony withdraw pf..

 

[Chitra Thakre]

Considering PF is a EEE instrument and for retirement purposes, and you get tax benefits on home loan, if you are in no pressure, pls do not use you PF corpus. The age of the loan will also have a huge implication on the decision, that's one point you should keep in mind.

 

[Kalyan]

I currently have a home loan outstanding of ₹36 lakh out of the total ₹55 lakh. The interest rate on the loan is 8.5%. I've been considering withdrawing money from my Provident Fund (PF) to prepay a large portion of this home loan.
From a pure mathematical standpoint, prepaying the loan could potentially save me a significant amount of interest costs over the remaining tenure. At 8.5% interest, the overall interest outgo on the outstanding ₹35 lakh would be quite high.

However, withdrawing PF has its own implications:

• Tax Implications: PF withdrawals are taxable, so a substantial portion of the withdrawn amount may go towards paying income tax.
• Loss of Tax Benefits: PF contributions qualify for tax deductions under Section 80C. Withdrawing the corpus would mean losing out on this tax benefit for the corresponding number of years.
• Opportunity Cost: The PF corpus grows tax-free, benefiting from compounding. Withdrawing it means losing out on this growth potential.
• Contingency Fund: The PF acts as a contingency fund for retirement. Withdrawing it could impact my retirement planning.

So while prepaying the home loan could provide relief from the high interest burden, it's crucial to evaluate the opportunity cost and tax implications of withdrawing PF.

I'd appreciate insights from others who may have been in a similar situation. What were the key factors you considered while deciding whether to withdraw PF for prepaying loans?
Any advice on optimizing this decision would be invaluable.

Instead of prepaying by withdrawing your PF,increase your emi by 10% every year,you will see a drastic drop in your tenure by the way of doing it. Hence,the lower interest you will end up paying.