Dipping early into your retirement kitty

Source: BusinessLine

A few days back, the government allowed public provident fund (PPF) subscribers to close their accounts prematurely — before the 15-year lock-in period. So far, only partial withdrawals were allowed from the PPF account. The recent move brings PPF on a par with employees’ provident fund (EPF) and national pension system (NPS) that allow subscribers to close accounts before the intended maturity period. Also, all these three long-term investment options allow partial withdrawal. But, full or partial, withdrawals from these investments — meant to build your retirement nest egg — come with ifs and buts. Here’s a look at when and how much you can dip into early.

PPF

After the recent changes, you can both close your PPF account or withdraw from it partially after completing five financial years from the account opening date. Here’s an example. Say, you opened the PPF account in October 2015, that is, in the financial year April 2015 to March 2016. So, the first full financial year after this would be 2016-17 and the fifth year would be 2020-21. Ergo: you can close the account or withdraw funds in 2021-22. You can prematurely close the PPF account — yours or that of your minor child — only for two purposes — medical expenditure or higher education.

If the amount is required for the treatment of serious ailments or life threatening diseases of the account holder, spouse, dependent children or parents, or for higher education of the account holder or the minor account holder, you can call it quits before the 15-year period. But this will be allowed only on production of documentary evidence. Also, premature closure comes with a penalty — the interest you will earn through the account tenure will be 1 percentage point lower than that you would have got otherwise.

Now, if you want to dip into the PPF partially without closing it, there are no end-use restrictions — you can use the amount for whatever purpose you want. But there are limits, a tad complicated, to how much you can withdraw. It’s the lesser of the following — half the balance at the end of the fourth year prior to the year of withdrawal, or half the balance at the end of the immediate preceding year.

Say, you decide to withdraw partially from the PPF account in June 2021 (financial year 2021-22). If the balance at the end of March 2018 (four years prior) is ₹2 lakh and at the end of March 2021 (immediate preceding year) is ₹3 lakh, you can withdrawn a maximum ₹1 lakh (half of ₹2 lakh). You can withdraw partially from the PPF only once a year. Full or partial withdrawal from the PPF account does not entail any tax liability on you.

EPF

But there could be tax implications though when it comes to withdrawing from the EPF account. You can close your EPF account and withdraw the entire balance if you have quit your job and been unemployed for at least two months.

There was a proposal recently to not allow withdrawal of the employer’s contribution before the employee turned 58. A severe backlash forced the government to backtrack on this proposal. So, as earlier, you can now get the whole amount from your EPF account if you choose to close it. There could be tax implications though. If you withdraw your EPF balance before completing five years of service, whether with the same employer or with different employers, you will forfeit the tax benefits enjoyed earlier.

Partial withdrawal from your EPF account is also allowed up to certain limits for specified purposes. These include buying, constructing or repairing a house, medical expenses, marriage, higher education and repayment of home loan. But the withdrawal may be allowed only if you have been employed for a minimum period. There is no tax liability on you for such partial withdrawals. You will have to give documentary evidence of your requirement, and if you do not use the funds for the specified purpose, you will be liable to refund it with penal interest.

NPS

The government has been actively promoting NPS as a retirement and pension solution, making the product more flexible and tax-friendly over the last one to two years. Changes announced last year extended the timelines by up to three years after maturity for buying annuity and till the age of 70 for withdrawing the balance corpus. This gave some breathing space to investors if annuity rates weren’t attractive enough in the year of maturity. The recent Budget provided a key tax-break by making the amount invested in annuity as well as 40 per cent of the amount withdrawn at maturity tax-free. You can close earlier too (after minimum 10 years of contributions) but then at least 80 per cent of the amount has to be used to buy annuity.

Besides, last year, the government also allowed partial withdrawal from the NPS. So, if you have been with the scheme for at least 10 years, you can withdraw up to 25 per cent of your contributions (not the accumulated value). Such withdrawal is allowed for purposes such as higher education and marriage of children, treatment of critical illnesses for self and close family members, construction or purchase of first house. You can partially withdraw three times with a gap of five years between the withdrawals; this five-year gap is not required in the case of withdrawal for medical treatment. Reports suggest that such withdrawals may be tax-free.

Exercise caution before dipping into your PPF, EPF and NPS balances as it erodes your retirement corpus and dilutes compounding power.

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