Retirement funds: Don’t crack your nest egg

While partial withdrawal of money from retirement funds such as National Pension System (NPS) and Employees’ Provident Fund (EPF) can help meet an immediate financial crisis, it can impact the long-term compounding benefits these funds offer so as to create a nest egg.

In fact, data from Pension Fund Regulatory and Development Authority’s (PFRDA) Handbook of National Pension System Statistics 2023, the first edition in the series, show cases of partial withdrawal from NPS have grown 3.7 times in FY23 to 4,86,629 from 1.31,482 in FY22. Most of the cases for partial withdrawals were for purchase or construction of a residential house —a rise of 4.3 times to 3,25,341 in FY23 from 75,292 cases in FY22. Partial withdrawals for higher education of children has grown almost seven times to 58,360 in FY23 from 8,539 in FY22. Partial withdrawal for skill development or re-skilling has grown 4.7 times to 12,236 in FY23 from 2,581 in FY22.

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Similarly, partial withdrawals from EPF are growing. Data from EPFO show the number of partial withdrawals at 2.3 crore in FY22, six times up from 38 lakh in FY19.

Norms for partial withdrawal

Partial withdrawal can be for higher education or marriage of the subscriber or his children, construction of a residential house or a flat, and treatment of specified illnesses. In case of NPS, a subscriber can withdraw after three years from the date of joining and is eligible for three partial withdrawals during the entire tenure of subscription. Each withdrawal cannot exceed 25% of the contributions made by the subscriber, excluding contributions made by the employer. There is no restriction on withdrawals from the tier-II account.

In case of EPF, for construction or purchase of house/land, an individual can withdraw up to 24 times for land and up to 36 times for house of the monthly basic salary and dearness allowance (DA). In case of higher education of self or children, up to 50% of employee’s share of total contribution to EPF is allowed.

Avoid dipping into retirement funds

Repeated partial withdrawals will leave a subscriber with a small corpus and defeat the very purpose of these retirement funds. Sushil Jain, CEO,, a wealth management firm, says the tenure of investment is more important than the amount of investment. “If you withdraw the funds before retirement and start accumulating again for retirement then you will have less tenure to create the desired corpus.”

For example, if you invest Rs 5,000 per month for 30 years yielding 8% return, the corpus will be around Rs 75 lakh against your investment of Rs 18 lakh. On the other hand, if you invest Rs 10,000 per month for 20 years yielding the same 8% return, you will get Rs 60 lakh against your investment of Rs 24 lakh. So, if you want to get the benefit of compounding you must invest for a longer horizon.

Opt for a loan

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It is better to go for a loan instead of breaking into your retirement corpus. For building a house or education of children, there are loan options. Moreover, a housing or an education loan is most tax-efficient and brings down the real cost of borrowing. However, in case the retirement corpus is depleted due to partial withdrawals, the only option is a reverse mortgage in case the individual owns a mortgage-free property.

In case of a housing loan, the borrower gets tax benefits of up to Rs 1.5 lakh on the principal repayment under Section 80C and up to Rs 2 lakh under Section 24 on the interest paid. For an education loan, the borrower can claim deduction on the interest amount paid under Section 80E.

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