The Public Provident Fund scheme, which was established in 1968, allows individuals to make small savings while receiving returns on those savings. The PPF scheme provides attractive returns while exempting investors from paying taxes on their earnings.
PPF accounts allow subscribers to take out personal loans against the account's available balance at a competitive interest rate. This is advantageous for individuals seeking short-term loans without pledging any assets as collateral.
PPF investments are considered one of the safest and most beneficial modes of investment, and they also provide loans against the amount invested. Account-holders can take out a personal loan against their account investments at competitive interest rates.
When applying for a loan against a PPF account, the following factors must be considered:
Loans against a Public Provident Fund account can be obtained between the third and sixth fiscal year of account opening; after that, individuals can withdraw a portion of the amount from their PPF account.
Only 25% of the investments made at the end of the second fiscal year preceding the year in which the loan was applied for are eligible.
Before you can get the second loan on your PPF account, you must first pay off the first one (in case you plan to take more than one loan on your PPF account).
The interest rate on the loan is set to be 2% higher than the interest rate on the balance in the PPF account, implying that changes in the interest rate on the PPF account affect the interest rate on the loan against the PPF account as well.
It should be noted that once an interest rate is set for a loan, it does not change until the loan's term expires.
If the account holder does not repay the loan within 36 months, the applicable interest rate will be 6% higher than the interest earned.
If the borrower repays the principal amount but fails to repay a portion of the interest amount, the remaining amount will be deducted from the individual's Public Provident Fund account balance.
The principal amount must be repaid first, followed by the interest amount, which must be paid in two monthly installments or less.
It should be noted that a borrower cannot apply for a second loan unless and until his first loan has been completely repaid.
What you should know about a PPF account is as follows:
A PPF account has a 15-year lock-in period. Account-holders, however, have the option to extend the lock-in period for an additional five years
A PPF account can be opened for as little as Rs.100
The maximum annual investment in a PPF account is Rs.1.5 lakh. If additional investments are made, no interest will be paid and no tax breaks will be provided
A PPF account can be funded with a cheque, a demand draft, an online transfer, or cash
Every fiscal year, a minimum of Rs.500 and a maximum of Rs.1.5Lakh must be deposited in a PPF account
A PPF can be closed early after 5 years if certain conditions are met, such as the wedding of children/siblings, medical treatment of self/family members, or education of self/child
A parent can open a PPF account in his or her child's name until the child reaches the age of majority. After the child reaches the age of 18, the account must be transferred into his/her name and managed by him/her
A PPF account can only be closed after 15 years of operation. However, partial withdrawals from a PPF account are permitted under certain conditions
A loan against your PPF account can be beneficial in a variety of ways. Here are some of the main advantages of doing so:
1. No collateral or mortgage is required
When taking a loan against your PPF account, you will not be required to pledge any asset as collateral.
2. 36-month repayment period
The loan can be repaid in 36 months. This timeline begins on the first of the month following the month in which the loan is approved. For example, if the loan was approved on January 25, 2018, the loan term of 36 months begins on February 1, 2018.
3. Low-interest rates
One of the most significant advantages of taking out a loan against your PPF account is the low-interest rate. Interest rates are significantly lower than those of traditional bank personal loans.
4. Flexibility in repayment
The loan's principal amount can be repaid in two or more installments (on a monthly basis) or as a lump sum.
Premature closure of a PPF account is permitted only after 5 years from the end of the fiscal year in which the account was opened. However, this is only permitted under certain conditions, such as:
Funding for the treatment of serious illnesses suffered by the account holder/spouse/dependent children/parents.
Funding the account holder's higher education.
According to the most recent changes to the Public Provident Fund Scheme 2019, premature closure of a PPF account is now permitted under the following conditions:
In the event that the account holder's residency status changes.
If the account holder needs to fund his or her dependent children's higher education.
However, when applying for PPF premature closure under any of the conditions listed above, the account holder must provide the following documents:
A copy of your passport and visa, as well as your income tax return (in case of a change in residency status)
Documents and fee bills for admission to a recognised institute of higher learning in India or abroad (in case of higher education)
It should be noted that premature closure of a Public Provident Fund account carries a 1% reduction in the rate at which interest is credited to the account.
The interest rate on the loan against PPF has been set at 1% higher than the accrued interest on the PPF balance. As a result, the interest rate on this loan is subject to fluctuation. The current annual interest rate on PPF is 7.10%.
The loan is repayable in 36 monthly installments. If the loan is not repaid within 36 months, the interest rate will be increased to 6% higher than the PPF account interest rate. The principal loan must be repaid first, followed by the interest, which must be paid in two installments or less.
If the borrower repays the principal amount but not the accrued interest within the loan term, the outstanding amount will be deducted from his PPF account.
Account holders are eligible to borrow against their PPF account between the third and sixth fiscal years after opening the account. Following that, individuals can only withdraw a portion of their PPF account balance.
The interest charged on the loan against the Public Provident Fund account is 2% higher than the interest earned on the PPF account balance.
Only 25% of total investments made at the end of the second fiscal year preceding the year in which the loan was applied for can be withdrawn.
The account holder must repay the loan amount within 36 months of borrowing, after which the interest rate on the borrowed amount will increase from 2% to 6%.
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