Home / Money / Personal Finance /  Do a cost-benefit analysis when you decide on repayment of loans

I have served three employers (including the current one) between 2015 and 2020, with no gap in employment. Recently, I transferred the employees’ provident fund (EPF) from the account with employer 1 to that of employer 2 and then this accumulated EPF to the account with employer 3. Can I now claim advance withdrawal? Will the EPFO office consider the total length of employment as five years, as the first contribution was made in 2015 by employer 1? Do they consider the age of universal account number (UAN) creation?

—Vicky Rawal

You have completed five years of continuous service. And yes, the service under the previous employers is also considered to calculate the continuous period of service. And in case of any withdrawal, the EPFO will consider the service rendered as five years and not the service of the current employer.

My father recently passed away, and I have received his pension of 38 lakh. I have a car loan outstanding balance of 10 lakh, a home loan outstanding balance of 28 lakh (6.7%), a top-up loan outstanding balance of 22 lakh (7.8%). I do not plan to close all my loans but want an optimum solution. Currently, I am getting a tax rebate on a home loan, but this can change next year; prepaying the car loan will fetch a penalty. I am unsure if I should invest some money in a gold loan scheme, put some money in public provident fund (PPF), some in debt mutual funds. I am not sure if investing in the share market is a wise decision considering there could be a market correction soon. I am a risk-averse investor.

—Name withheld on request

It is recommended that the loans be pruned down, and a cost-benefit analysis be done to decide on the repayment of loans. The benchmark, in this case, will be the reinvestment return. As you are risk-averse, the return on a debt mutual fund will be, let’s say, an average of 6%. And the key is to check if the cost of borrowing is higher than the said rate. In your case, a car loan can be repaid, as the cost of borrowing will be higher, but as there is a prepayment penalty, it needs to be evaluated accordingly. Likewise, the top-up loan can also be considered for repayment as you are not getting any tax benefit, thereby the cost of borrowing remains the same and is higher than the potential earning capacity. Only the housing loan can be continued, as the net cost of borrowing post tax savings will be lower than the potential earnings. The surplus of the corpus received from your father’s pension account can then be reinvested in PPF and debt mutual funds. You can even consider balanced advantage funds that dynamically manage the equity exposure. However, this is to be done only if you have a long-term investment plan and can consider taking some risk to the portfolio. This will enable you to generate inflation-adjusted returns if held for the long term.

I retired in February 2019. and received the final payment of employees’ provident fund (EPF) on 11 July 2019. Will the final payment of EPF received be taxable, since I will file my income tax return for FY20?

—Name withheld on request

In your case, the most important thing is the period of continuous service, i.e., if you have retired from your job after the completion of at least five years of continuous service, which also includes any change in employment during the period of five years. In that case, the full and final payment of provident fund will be tax free in your hands.

Surya Bhatia is managing partner of Asset Managers.

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