Employee Provident Fund (EPF) is one of the favorite saving schemes among the employees due to the tax benefits and lower risk. It is usually used for wealth creation and corpus building for retirement. The current interest rate is 7.1% p.a. (for the quarter 1 April 2020 to 30 June 2020), that is compounded annually.
The employer deducts 12% (reduced to 10% from 12% for non-government organizations) of your basic salary (Dearness allowance, if forms part of the salary) from your salary and deposited the same in your EPF account. All EPF related details, balance, and contributions are maintained by the Employee’s Provident Fund Organization (EPFO).
The EPF has a lock-in period of 15 years. However, in case of emergency of funds, the EPFO provides the facility of EPF loan or EPF advance to the account holders against his/her investments made and use it in case of financial crises. EPF Loan is not exactly a loan, but actually, an advance.
Benefits of taking loan against EPF
- Short term loan with no collateral or mortgage
- Tenure of 36 months
- The lowest rate of interest
- Repayment allowed in two or more installment or even in a lump sum
When can you take loan against EPF?
As per EPF rules, an individual can take a loan from the beginning of 3rd year till the 6th year of opening of the account. Once this period of the loan is over, the EPF account holder cannot take a loan from the account.
For example: if you opened your EPF account in July 2019-20, your loan facility will start from the 3rd year of the opening of the account, which is 2021-22 and will continue till the 6th year of opening of the EPF account, which is till 2024-25.
EPF loan interest rate
In December 2019, the government changed the EPF rules regarding the rate of interest charged. Any loan against EPF taken from or after December 12, 2019, will be charged at the rate of 1% per annum. Earlier the rate was 2% percent.
Note: Interest rates on EPF interest vary quarterly. However, once the rate of interest is fixed at the beginning of the loan, the same would continue over the entire repayment period.
Loan amount that can be availed
An EPF member can avail of a maximum loan of 25 percent of the amount that was available in the account at the end of the second year prior to the year in which loan is being applied.
For example: if you opened your EPF account in July 2019-20 and you have applied for a loan on 2023-24, you will be eligible for 25 percent of the closing balance in 2020-21.
Tenure of the loan
The loan against the EPF account comes with a maximum repayment schedule of 3 years (36 months). This tenure is calculated from the first day of the month, succeeding the month in which the loan amount was approved and sanctioned.
Default in repayment of the loan
In the case of non-repayment of loan within the tenure, the applicable rate of interest shall be 6%.
Further, if the individual has repaid the principal amount within the loan tenure, but the interest amount remains unpaid, the outstanding amount will be deducted from the individual’s EPF account balance.
Note: After repayment of the first loan only, you are eligible for another loan against EPF.
No interest income on EPF loan amount
Although the loan against EPF charges only 1% p.a, but you will not receive any interest on the EPF account (up to the extent of the amount of loan you have taken) until you repays the principal amount along with interest.
Hence, it should be considered before borrowing the loan that you will lose out on the tax-exempt interest amount that you earn on your EPF.
EPF loan rules
The employer should have a valid reason to take a loan against EPF. Key reasons to avail an EPF Loan/advance are as follows:
| Reason | Description | Minimum service limit |
| Education | You can withdraw from PF for your own education or the education of your daughter, son, brother, or sister. | Minimum 7 years of service |
| Marriage | You can take an EPF advance for your own marriage or your son’s and daughter’s marriage. | Minimum 7 years of service |
| Purchase of home or plot or construction of site | As the purchase of home or plot requires a significant amount, the Employee Provident Fund loan is available to the applicant. | Minimum 5 years of service |
| Medical treatment | If your spouse, daughter, son, dependent father or mother is suffering from some serious illness, you can take loan against your EPF for the treatment. | No limit |
| Home loan payment | The payment of the home loan can also be done through EPF advance after submitting a certificate of outstanding principal and interest. | Minimum 10 years of service |
| Natural Calamity | Natural calamity causes a huge loss and creates the need for emergency funds. | No limit |
| Addition/ alternation of house | The EPF loan can also be taken to renovate or expand your existing house. | Minimum 10 years of service |
| Lockout | During lockout situations, an applicant may stop receiving his salary. Thus, to cope with and afford basic necessities of life, the EPF loan is available to those applicants. | No limit |
| Withdrawal before the retirement | An applicant can withdraw the majority of his/ her corpus before one year of retirement. | No limit |
| Advance in special cases | i. Closure of establishment for over 15 days and employees are unemployed without getting any compensation ii. The employee has not received a salary for more than two months continuously | Not Applicable |
How to get a loan from the EPF account?
If you need loan/advance from EPF account, you need to follow the two primary conditions:
- Form -31 – EPF Advance form (PF account number, salary and bank account details)
- Relevant documents are supporting your reason, such as medical certificate by the doctor, marriage certificate, loan repayment certificate from the agency, etc.
Form 31 is available at the EPFO official website. After submitting Form and documents, your claim shall be processed and directly credited to your bank account.
EPF loan status
The EPFO portal allows you to check the EPF loan status online. All you need to log in to your account and submit the PF account number to check the status online.