The Public Provident Fund (PPF) is a popular savings account in India. It offers tax-free returns on small deposits. Subscribers can take out personal loans against their account balance. These loans have competitive interest rates. You do not need to provide any collateral for these loans.
The Public Provident Fund (PPF) is a long-term investment plan backed by the government that pays attractive interest rates and returns. These returns are entirely tax-free.
PPF account holders who meet the eligibility criteria can avail of loans in times of financial crisis. This is known as a Loan Against PPF.
PPF account holders are eligible to borrow up to 25% of their balance after the third financial year as a loan. This facility is available until the end of the sixth financial year.
Every PPF account holder is eligible for a loan during a specific window. This period starts in the third year of the account. It ends at the close of the sixth year. For example, an account opened in 2024 is eligible for a loan from 2026 to 2030.
When applying for a loan against a PPF account, the following factors must be considered:
You can only borrow up to 25% of your account balance. This limit is based on the balance from two years before your application. For example, a loan applied for in Year 4 uses the balance from the end of Year 2.
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 a PPF loan is always 1% higher than the current PPF interest rate. For example, if the PPF rate is 7.1%, the loan rate will be 8.1%. This means any change in the PPF account rate will also change your loan interest rate.
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 you do not repay the loan within 36 months, the interest rate increases. The rate becomes 6% higher than the PPF interest rate. For example, if your PPF earns 7.1%, the penalty loan rate becomes 13.1%.
This higher rate applies from the first day you took the loan.
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.
You must pay back the principal amount first. After the principal is clear, you pay the interest amount. This interest must be paid in two monthly installments or fewer.
It should be noted that a borrower cannot apply for a second loan unless and until his first loan has been completely repaid.
Related Pages: How To Open PPF Account
To get a loan against your PPF account, you must:
Collect Form D from your post office or bank branch.
Provide your PPF account number and the loan amount on the form.
Attach a copy of your passbook to the application.
Finally, include a statement that you will repay the principal and interest within three years.
Submit the form where you hold your account.
Let us look at a real-world scenario where Mr. Kumar opens a PPF account in April 2024:
|
Fiscal year 1 |
April 2024 - March 2025 |
Account opened. |
|
Fiscal year 2 |
April 2025 - March 2026 |
|
|
Fiscal year 3 |
April 2026 - March 2027 |
Mr. Kumar can take a loan against the PPF account starting this year. |
|
Fiscal year 4 |
April 2027 - March 2028 |
Eligible for loan. |
|
Fiscal year 5 |
April 2028 - March 2029 |
Eligible for loan. |
|
Fiscal year 6 |
April 2029 - March 2030 |
Mr. Kumar can take a loan against the PPF account until the end of this year. |
|
Fiscal year 7 |
April 2030 - March 2031 |
Mr. Kumar is eligible to make withdrawals from his PPF account. |
PPF account benefits are numerous, and a loan against your PPF account is beneficial in a variety of ways. Here are some of the main advantages of doing so:
When taking a loan against your PPF account, you will not be required to pledge any assets as collateral.
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.
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.
The loan's principal amount can be repaid in two or more installments (on a monthly basis) or as a lump sum.
While a loan against PPF serves as a respite in times of financial hardship, it has its fair share of disadvantages too.
PPF account holders will not earn any interest on the remaining balance until the loan is repaid in full.
Since only 25% of the PPF amount available can be availed as a loan, it may or may not satisfy your necessities.
Additionally, the short repayment tenure, i.e. 36 months or 3 years, makes it hard for many to repay the loan in full.
In case the loan is not repaid in full within the stipulated time, the interest rate increases.
Moreover, if the interest rate is not paid, it will be deducted from the PPF balance, causing you to lose your hard-earned money.
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 PPF interest history has fluctuated depending on the market. The current annual PPF rate of interest 2023-2024, or PPF rate today, is 7.10%. Hence, the interest rate on a loan against PPF is 8.1%.
The loan is repayable in 36 monthly installments. If the loan is not repaid within 36 months or is only partially paid, 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 fewer.
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.
A loan against PPF comes with several benefits. However, it has several drawbacks as well. When you are in urgent need of funds, a loan against PPF can be your saving grace as it comes at a lower interest rate than a personal loan. Make sure you understand the terms involved before going for a PPF loan.
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Disclaimer
The starting interest rate depends on factors such as credit history, financial obligations, specific lender's criteria and Terms and conditions. Moneyview is a digital lending platform; all loans are evaluated and disbursed by our lending partners, who are registered as Non-Banking Financial Companies or Banks with the Reserve Bank of India.
This article is for informational purposes only and does not constitute financial or legal advice. Always consult with your financial advisor for specific guidance.
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