09 DECEMBER, 2021

Home loans help you fund your house purchase without exhausting your savings. Hence, before availing a housing loan, make sure to compute the EMI using a home loan calculator so that you opt for an EMI and tenure, keeping your budget in mind.

However, the lender does not finance the entire cost of your house. You need to pay a small amount upfront, which is called down payment. You need to pay at least 15-20% of the property cost as a down payment, as without it, it could be challenging for you to get a home loan.

However, what if you do not have funds for a down payment? Should you let go of your dream home? Certainly not. You can liquidate your investments to arrange funds. Provident Fund is one such investment that people usually prefer to pay the down payment. However, is it the right step to withdraw your PF account for a down payment? Let's find out.

What is a provident fund?

Provident fund is a risk-free, government-managed retirement scheme for employees. In this, the employees deposit a part of their salaries in a fund. Similarly, the employer also deposits an equal amount in the same fund. The amount from this fund can be withdrawn as a lump sum after retirement or after the employer leaves the company.

Can PF be used for down payment?

You might know as a salaried employee that the PF amount is at your disposal, and you can use it at your convenience. If you apply for home loan when buying a house, it could be a good idea to use the PF amount for the same. However, you must know the process of withdrawal and the terms and conditions attached to it. You can withdraw your PF for buying a plot and for constructing or buying a house.

For buying a plot

To buy a plot, you must have a PF contribution of minimum 5 years. The withdrawal limit is your basic salary for 24 months and DA. You can withdraw an amount that is equal to the cost of the plot.

For buying or constructing a house

To buy a house, your minimum contribution in PF should be at least 5 years. The withdrawal limit is 36 months of basic salary with DA. Some of the additional conditions are:

  • The maximum amount you can withdraw is the cost of your house. However, if you are buying a property jointly, your co-owner should only be your spouse. The transactions of the house should be done within six months of withdrawal.
  • If this withdrawal is for constructing a house, the house construction should start within six months and should be completed within 12 months from the time you withdrew the last instalment.

While you decide to withdraw the PF for a home loan down payment, you must know its benefits and disadvantages. It might not be a wise decision to use PF amount if you are earning high returns on them. You can then instead use fixed deposits for a down payment. In addition, you must ensure to check the tax implications of withdrawing the PF amount. You must weigh your options and then make an informed decision.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.