In India, the Public Provident Fund (PPF) is a popular investment option because it offers government support, a consistent return, and tax breaks. Many people are unaware that, in certain circumstances, they can borrow money against their PPF balance. This guide covers the fundamentals of a loan against PPF, including its benefits, eligibility, and application process.
What is a Loan against PPF?
Taking out a loan against your Public Provident Fund account is an option available to you as an account holder. It allows you to take out a loan against the amount in your PPF. After you open a PPF account, you can choose to do this between the third and sixth fiscal years. The primary advantage of this loan is that it ensures that your investment will continue to earn interest while enabling you to use your savings without actually withdrawing them.
Features of Loan Against PPF Account
- Anyone with a PPF account can apply for a PPF loan.
- Beginning with the seventh fiscal year, a partial withdrawal from the account is permitted.
- Account holders can choose to take out this loan between the third and sixth fiscal years after opening their PPF account.
- The interest rate that is being applied is 2% higher than the interest earned on the remaining balance in the PPF account.
- 25% of the balance at the end of the second fiscal year prior to the loan application year is the maximum loan amount. As of March 2019, an account holder’s maximum borrowing capacity would be 25% of the total amount if they choose to take out a loan as soon as is legally permitted.
Benefits of taking a PPF Loan
- Low interest rate: PPF loans have a much lower interest rate than credit card advances and personal loans, which makes them an affordable borrowing choice for you.
- No impact on PPF savings: Your PPF interest continues to earn on your balance even when you have an outstanding loan and this ensures that your long-term savings are both protected as well as compounded.
- Simple repayment terms: The entire process is quite easy and takes only a few minutes, and there are no credit score requirements since the loan is secured against your PPF balance.
- No credit check: The process is rather simple and quick, and no credit score is needed because the loan is secured against your PPF balance.
- Emergency medical expenses: A PPF loan provides immediate access to money during medical emergencies or when needed for other pressing expenses.
- Education fees: A loan against PPF makes it easier for you to pay for your child’s education by helping you manage the costs efficiently.
How is Loan Against PPF Amount Calculated?
25% of the balance from the second year right before the year the PPF loan application is submitted is used to determine the loan amount that is available in a PPF account. For instance, the account holder may withdraw up to Rs. 25,000 during the fiscal year 2022–2023 if the PPF account balance was Rs. 1,00,000 on March 31, 2021.
In contrast to conventional loans, a PPF account’s loan amount is independent of a borrower’s income and creditworthiness. At the end of the second fiscal year, which is shortly before the year in which you take out the loan, the maximum borrowing limit is limited to 25% of the PPF account balance.
PPF Loan Terms and Conditions
- Interest rate: The interest rate on the loan is 1% greater than the current PPF interest rate.
- Second loan: Only after the first loan has been paid back in full can a second one be obtained.
- Loan amount: You can borrow up to 25% of your PPF balance following the second fiscal year before the year you apply.
- Repayment period: Within 36 months, the loan must be paid back. Higher interest rates may be applied, and the loan amount will be deducted from your PPF balance if you don’t repay it within this time frame.
How to avail of a PPF Loan?
- Check eligibility: Make sure it has been three to six years since you opened your PPF account.
- Apply: Complete Form D, which can be found at your post office or bank.
- Documentation: Present the required paperwork, such as your PPF passbook.
- Approval and disbursement: The loan amount will be credited to your bank account after your application has been processed.
Conclusion
A PPF account can be used as collateral to avail of a loan, it is also beneficial because money can be made available without consuming your savings and interest has been earned. Low interest rates, flexible repayment terms, and a simple application process make it the best option for covering unexpected financial obligations or emergencies without jeopardizing portfolio assets over time.