How Can Your Provident Fund Deposits Help You Purchase a Home?

Last Updated : May 9, 2020, 12:15 p.m.

Purchasing a home is a thankless job as it requires a razor-sharp focus on the part of buyers. And, if you are planning to buy it on a home loan, the focus needs to be even stronger. Because a home loan alone can’t help you buy a home till the time you have savings to pay for the expenses that it does not cover. If you’re new to a home loan , let’s be told that it is financed to the extent of 75%-90% of the cost of the property, including the land cost. You need to pay the remaining 10%-25% of the property cost to the seller. But it doesn’t stop there. Expenses such as processing fee, legal & valuation fee, stamp duty & registration charges are to be borne by you too.

Given the challenges one faces these days, it becomes difficult to maintain savings at par with the required expenses, forcing many to postpone their home purchase. To ensure a greater degree of home ownership, the retirement body Employees Provident Fund Organization ( EPFO ) has allowed withdrawals for the said purpose. But how should you go about using the provident fund corpus to buy a home? That you will get to know in this post. So, read and implement savings strategies accordingly.

Let’s Figure Out the Cost not Covered by a Home Loan First

As provident fund corpus is for a specific purpose and that is to make your life enjoyable after you retire, you need to show discretion while using its surplus. That’s why you should look to save the amount that is not financed by home loans . A portion of such expenses can be met by your provident fund deposits.

But first, you need to figure out the property for which you can not only pay the Equated Monthly Installment (EMI) easily but also the expenses before the loan disbursal. These expenses include the processing fee and other costs mentioned above. The processing fee could be around 0.25%-1% of the loan amount plus goods and services tax (GST) . The legal and valuation expenses can either be a part of the processing fee or be taken separately. On the other hand, stamp duty can be 2%-5% of the market value of the property. Registration charges can be around 1% of the market value of the property.

So, the home purchase plan should begin 5 years before you buy your dream home. Check what your current income is and add 10% every year. So, if your net take home salary is INR 50,000 presently, it will increase to around INR 80,000 after 5 years assuming a 10% hike in the annual remuneration. As a borrower, one should like to have their EMIs not more than 50%-60% of their net income. Considering that, you should look for a loan of around INR 50 lakh. The EMI for such a loan amount for 20 years at 8.50% interest rate will come as INR 43,391, which is within the optimum EMI/NMI ratio.

The processing fee, if levied at 0.50% of the loan amount, will come as INR 29,500 (Inclusive of 18% GST). Since the loan amount is INR 50 lakh (between 30 lakh and 75 lakh) it will most likely account for 80% of the property cost given the loan to value ratio that exists now. So, the cost of the property will most likely be INR 62,50,000 (50,00,000×100/80). The down payment will thus be around INR 12,50,000 Assuming stamp duty is levied at 3% of the property value, the amount will come as INR 1,87,500. The registration charges at 1% will come as INR 62,500. If we add all, the total comes as INR 15,29,500.

How Should You Ramp Up Your Savings to Accumulate This Massive Sum?

Look to save at least INR 20,000 a month for 5 years. This way you can garner a sum of INR 12 lakh. With the interest on the savings account deposits over these 5 years, you could add at least 1 lakh. The total accumulation from the savings account will be INR 13 Lakh. So, you are INR 2.30 lakh short of the amount you require to buy a home. You can withdraw a maximum of 36 months’ basic salary and dearness allowance or provident fund corpus, whichever is lower, for buying a home. Your employer deducts 12% of your basic salary and dearness allowance and deposits it in your EPF account, marking it as your contribution. Assuming your basic salary and dearness allowance adds up to INR 15,000, your contribution to EPF for the first year will be around INR 21,600. If such salary constituents rise by 5% every year, the contribution to EPF for the subsequent years will be the ones shown in the table below. All this will add to one tall provident fund corpus. Take a look.

So, your overall contribution to the EPF account will come as INR 1,29,499.14 (inclusive of interest) over these five years. But your employer too contributes to the EPF account. The same 12% of the basic salary and dearness allowance is deducted and contributed from the employer. But around 8.33% of the same is diverted to the pension scheme. Only 3.67% stays with the provident fund. Employer contribution to the EPF can be calculated by any of the following

• 12% of basic pay – 8.33% of INR 15,000
• 3.67% of INR 15,000

So, if your employer adopts the second method, its contribution to your EPF account will be INR, 33,030 in these 5 years. The interest will be around INR 2,807.55. The contribution to the pension scheme can be INR 74,970. All this adds up to INR 1,10,807.55. And, if you add your contribution to the one to be made by your employer, the overall total stands at INR 2,40,306.70 (1,29,499.14+1,10,807.55).

The maximum withdrawal from EPF is the lowest of 36 months’ basic salary and dearness allowance or the total EPF contribution as stated above. If we consider the table above, the basic salary and dearness allowance for 5 years will most likely be INR 9,94,613.76, including INR 6.25 lakh in the last 3 years. The EPF contribution for 5 years as stated above is INR 2,40,306.70. As you may have some contribution even now, the total will obviously be more than INR 2,40,306.70 five years down the line. You can anyhow get a minimum of INR 2,40,306.70 and that covers the amount of INR 2.30 lakh you need to buy a home.

Note – The calculations made in this post are purely indicative. As the provident fund withdrawal norms can change, you need to make alterations to your savings strategy accordingly.