Retirement is not an overriding priority for many people, especially the younger generation. However, as many people take up jobs at the private sector where there is no guarantee of any retirement income, it is essential for them to give a serious thought to the retirement planning goal.

Another aspect which one needs to deal with, is a person’s temptation to redeem to make impulsive purchases. Many may be tempted to dip into Employee Provident Fund (EPF) when they accumulate some years of savings. People and their financial advisors should see to it that clients do not use EPF for funding other goals. As soon they start earning, they indirectly start saving for their retirement through EPF and VPF. Hence one needs to ensure that he/she does not withdraw money from the this corpus which is meant for their retirement.

After one stops working, one’s daily expenses and healthcare costs keep rising with inflation factor but the income from the investments does not increase.

To provide a meaningful income to cover all expenses, the corpus should be sufficiently large and it is important that the same remains untouched till the retirement age.

Illustration – Effect of using Retirals for other goals, how you will have to invest more later or reduce your lifestyle
There is a high cost to be paid for breaking or dipping into long-term saving of retirement corpus.

Suppose, Malay, aged 40, is planning to invest Rs. 15000 pm, now onwards, for his retirement scheduled 15 years hence. The retirement corpus accumulated after 5 years is Rs 11,57,576 assuming his investments yield a return of 10% pa and inflation is 8% pa.

 However, if Malay decides to withdraw even 50% of the corpus after 5 years, the corpus available at the end of 5 years is Rs 5,78,788.

 If the full amount was allowed to be accumulated the corpus after 15 years would have been Rs 60,24,318.
 However since now only half the corpus is available Malay either needs to do additional savings to maintain the desired corpus of Rs 60,24,318 or adjust/reduce his life style expenditure to continue with the reduced corpus.

Thus it can be concluded, Premature withdrawals from the retirement savings would deprive investors of a sufficiently large corpus and would force them to save more to make good the desired corpus required.

In a bid to discourage premature withdrawals from the Provident Fund:

• the Employees’ Provident Fund Organisation has limited the withdrawals from EPF.

• The EPF members cannot withdraw full PF amount before attaining the age of retirement.

• The maximum withdrawal on cessation of employment cannot exceed an amount aggregating employee’s own contribution and interest accrued thereon.

• One can withdraw contributions + interest portion only. The employer’s portion can be withdrawn after attaining the retirement age (58 years)

However, subscribers of the Public Provident Fund (PPF) can prematurely close the deposit scheme after completing five years for reasons such as higher education or expenditure towards medical treatment.

Conditions of TDS on EPF Withdrawal

The EPFO can deduct tax on source (TDS) only if an employee falls under these 2 criteria.
1. The employee has not completed total 5 years of continuous service.
2. The EPF withdrawal amount is more than 50,000. Earlier this limit was Rs 30,000.

7 Situations When You Can Withdraw Money From Your Retirement Savings

If a person finds oneself in one of the following scenarios, withdrawing money early from the retirement savings might be financially prudent.
1. One becomes totally and permanently disabled.
2. One is in Medical Debt and can withdraw from retirement accounts to cover unreimbursed, out-of-pocket medical expenses.
3. A person is getting divorced and might be required by court to divide the funds with the former spouse or a dependent.
4. One is starting a Business and needs funds to finance a small business or startup. It is advisable to consult a financial planner in this regard.
5. One is purchasing a Home for the first time and is in lack of funds.
6. One needs to pay for higher education of children or own education.
7. A person is facing a foreclosure.

Why shoulden’t I use retiarls like EPF, Gratuity as business corpus?

A lot of new business owners opine that dipping into their retirement or savings accounts is the best way to fund a new business, but this should not be the case in reality because
• Besides having to pay taxes for early withdrawal of retirement funds like EPF, one also loses out on any future earnings that money could bring in, plus future tax benefits.
• Eventually there won’t be sufficient funds to fall back on during times of retirement, in case of a financial emergency etc.
• Using personal funds for business ventures is not a good proposition because a person should save for their future.

How to Fund Your New Business Without Using Savings?

Seek Out an Investor or Partner

One of the best ways to fund a new business is to work with a partner or investor who has the capital and is willing to invest in the new idea. This method is especially helpful if a person plans to launch a tech startup or product-based business, as the co partner or investor may have a large amount of capital to cover start up costs and inventory.
Consider Crowdfunding as an Option

Before investing time in researching and seeking out other ways to find money, it is good to consider offering the idea to the masses through crowd funding. This route could allow one to collect the cash needed upfront to kick start the new venture.

Bootstrap the Business

Bootstrapping a business is a smart way to build a business from the beginning without having to split any equity or revenue. Bootstrapping is the process of consciously spending time as a resource to grow the business instead of exclusively using money to grow it. However, Bootstrapping is a slower process, since a person chooses to do most of the work on own, or by asking friends and family to volunteer their skills.

Ultimately the choice is in the person’s hand – whether to dip into the retirement fund or not. It would be prudent to seek the help of a financial planner to study changed cash flows, impact on goals, and business funding methods.

Debalina Roy Chowdhury
Dilzer Consultants


Latest EPF Withdrawal Rules w.e.f 10th Feb 2016