Withdrawing money from retirement funds like the Employees’ Provident Fund (EPF), Public Provident Fund (PPF), or National Pension Scheme (NPS) before the designated retirement age can have significant financial and tax implications. Although it may be tempting to access these funds during financial emergencies, it can lead to penalties, tax deductions, and potentially undermine your long-term retirement planning. It's important to understand the potential consequences before deciding to make an early withdrawal.
Tax on Early Withdrawal: If you withdraw funds from your EPF account before completing 5 years of continuous service, the amount withdrawn will be subject to tax. The interest earned on the contributions will also be taxed.
TDS (Tax Deducted at Source): If the amount withdrawn exceeds ₹50,000 and the individual has not completed 5 years of service, TDS will be deducted at the rate of 10%. If the individual’s PAN is not linked to the account, the TDS will be deducted at 30%.
Taxable Interest: The interest on the withdrawn amount will also be subject to taxation unless the employee has completed 5 years of continuous service.
Tax Penalties: Early withdrawals from the PPF are allowed after the 6th year of investment. However, the amount withdrawn will be subject to taxation if the account has not been open for the full 15 years.
Partial Withdrawals: Partial withdrawals from a PPF account are allowed after 6 years, but the withdrawn amount will be taxed as per the applicable tax slab.
Loan Against PPF: Loans can be taken against the PPF balance, but this also reduces the overall corpus, which could impact the final amount upon maturity.
Tax on Withdrawal Before Retirement: Early withdrawal from the NPS (before the age of 60) is allowed, but it is subject to taxation. The withdrawal is partially taxable, where 60% of the corpus can be withdrawn as a lump sum, but it is subject to tax. The remaining amount is used to purchase an annuity.
Taxation of Annuity: The annuity purchased with the withdrawn amount is taxable as per the individual's income tax slab.
Reduced Corpus for Annuity: Withdrawing early reduces the final corpus that would have been used to purchase a larger annuity upon retirement, thus impacting future pension income.
One of the biggest disadvantages of early withdrawal from retirement funds is the loss of compound interest over the long term. EPF, PPF, and NPS are designed to grow through interest accrual over many years. By withdrawing early, you lose out on the interest that would have accumulated, which significantly reduces the final maturity amount.
For example, the interest earned on a PPF or EPF account is relatively high and tax-free, so early withdrawal can cause you to miss out on this lucrative benefit.
Reduced Retirement Corpus: The primary purpose of these funds is to provide financial security during retirement. Early withdrawals deplete the corpus that is meant to ensure sufficient income post-retirement. By taking out money early, you jeopardize your ability to maintain a comfortable lifestyle after retirement.
Increased Dependency: Early withdrawals can lead to increased dependency on other sources of income or savings later in life, potentially affecting your financial independence during retirement.
Section 80C: Contributions to EPF and PPF are eligible for tax deductions under Section 80C of the Income Tax Act. However, early withdrawal means you no longer benefit from the long-term compounding of the tax-saving investment, which could have been beneficial in reducing your taxable income in future years.
Section 80CCD: Contributions to NPS also qualify for tax deductions under Section 80CCD, but if you withdraw early, you lose the long-term tax benefits associated with the scheme.
EPF: You can only withdraw EPF before retirement under certain circumstances, such as for buying a house, medical emergencies, or education. Even in such cases, a partial withdrawal is usually allowed, and the remainder stays in your account.
PPF: PPF allows withdrawals after the 6th year but only up to 50% of the balance at the end of the 4th year preceding the withdrawal year. This makes it restrictive in terms of liquidity.
NPS: NPS offers partial withdrawals for specific reasons, such as higher education, marriage, or medical emergencies, but it’s not as flexible as other retirement funds.
Mr. Kumar invested in an EPF and PPF for his retirement. However, due to a financial emergency, he withdrew a portion of his EPF balance before completing 5 years of service. As a result, the withdrawn amount was subject to TDS of 10%, and the interest earned on his EPF balance was taxed. Additionally, he lost out on the compound interest that would have accrued over time. As a result, his final retirement corpus was significantly reduced, affecting his retirement plans.
Early withdrawal from retirement funds like EPF, PPF, or NPS can have significant consequences, including tax penalties, loss of compound interest, and a reduced retirement corpus. These withdrawals can disrupt long-term retirement planning and cause financial instability in the future. It’s important to assess the long-term financial impact before making early withdrawals and to consider alternatives such as loans or emergency funds to manage short-term financial needs.
Answer By Law4u Team
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