Personal Loan against PPF

Launched in 1968, the Public Provident Fund scheme enables individuals to make small savings while providing returns on those savings. The PPF scheme offers attractive returns and exempts investors from tax payments on the returns generated. Here’s what you should know about a PPF account-

• A PPF account has a lock-in period of 15 years. However, the account holders can extend the lock-in duration to a period of 5 more years
• A PPF account can be opened with an amount as low as Rs.100
• The total annual investment in a PPF account cannot be more than Rs.1.5Lakh. If any additional investments are made, no interest will be paid and no tax benefits will be offered on the same
• The amount in a PPF account can be deposited via cheque, Demand Draft, online transfer or cash
• A minimum of Rs.500 and a maximum of Rs.1.5Lakh must be deposited in a PPF account every financial year
• Premature closure of a PPF has been made possible after a period of 5 years under certain specific conditions such as the wedding of children/sibling, medical treatment of self/family member, education of self/child
• A parent can open a PPF account in the name of his/her child until he/she is a minor. After the child turns 18, the account must be transferred in his name and must be handled by him/her
• A PPF account can be closed only after 15 years of opening the account. However, partial withdrawals of the amount in PPF account can be made under certain conditions

Loan Against PPF Account

Investments made in Public Provident Fund are considered one of the safest and most beneficial modes of investment and also offer loans against the amount invested. Account-holders have the option of taking a personal loan against his/her investments made in the account at competitive interest rates.

The following points must be considered while applying for a loan against PPF account-

• Loan against a Public Provident Fund account can be availed between the third and sixth financial year of opening the account; post this the individuals can partially withdraw the amount from their PPF account
• An amount of only 25% of the investments made at the end of the second financial year preceding the year in which the loan was applied for can be availed
• Before availing the second loan on your PPF account, you must mandatorily clear your first loan (in case you plan to take more than one loan on your PPF account)
• The interest on the loan is fixed at 1% more than the interest earned on the balance in the PPF account, implying that the changes in the interest on PPF account affect the interest on loan against PPF account as well
• It must be noted that once the interest rate is set for a loan, there is no change in the interest rate until the duration of the loan ends
• If the account holder fails to repay the loan within 36 months, the applicable interest rate will rise to 6% more than the interest earned
• If the borrower manages to repay the principal amount within the loan tenure but fails to repay a part of the interest amount, then the remaining amount will be deducted from the Public Provident Fund account balance of the individual
• The borrower must repay the principal amount first followed by the interest amount, which is to be paid in two monthly instalments or lesser
• It must be noted that a borrower cannot apply for a second loan unless and until he has not repaid his first loan entirely

Benefits of Taking a Loan against PPF Account

You may consider borrowing a loan against your PPF account instead of other methods because of the following-

• Loans borrowed against PPF account do not ask for collateral or any mortgage
• The loan can be repaid within a time period of 36 months from the first day of the month following the one in which the loan was sanctioned
• Loans against PPF account have the lowest interest rates in comparison with traditional personal loans from other banks
• The borrowers can repay the principal amount either in two or more instalments or on a lump sum basis

Premature Closure of PPF Account

Premature closure of a PPF account is allowed only after the completion of 5 years from the end of the year in which the account was opened. However, this is allowed only under certain specific conditions such as-

• Financing the treatment of serious ailments of account holder/spouse/dependent children/parents
• Financing the higher education of the account holder

As per the recent changes made the Public Provident Fund Scheme 2019, premature closure of the PPF account is now also allowed under the following conditions-

• If there is a change in the residency status of the account holder
• If the account holder needs to finance the higher education of his/her dependent children

However, the account holder must furnish the following documents while applying for premature closure of PPF under any of the above mentioned conditions-

• Copy of Passport and Visa or Income Tax Return (in case of a change in residency status)
• Documents and fee bills for confirmation of admission in a recognized institute of higher education in India or abroad (in case of higher education)

It must be noted that the premature closure of a Public Provident Fund account is made at the stake of 1% reduction in the rate at which interest is credited to the account.

FAQs

Q. When can you take a loan against PPF account?

Ans. Account-holders are eligible to take a loan against PPF account between the third and sixth financial year of opening the account. After this, the individuals can only partially withdraw the amount from their PPF account.

Q. How much can you withdraw?

Ans. You can withdraw only an amount of 25% of the total investments made at the end of the second financial year preceding the year in which the loan was applied for.

Q. What will be the interest charged on the loan?

Ans. The interest charged on the loan against the Public Provident Fund account is 1% more than the interest earned on the balance in the PPF account.

Q. What will be the tenure of the loan?

Ans. The account holder must repay the loan amount within 36 months of borrowing, post which the rate of interest on the borrowed amount will rise from 1% over and above the existing PPF interest rate to 6% over and above the existing PPF interest rate.

Q. How do individuals repay the loan?

Ans. Borrowers of loan against Public Provident Fund account must repay the principal amount first and then the interest amount within a time period of 36 months of borrowing. The amount should be paid in two monthly instalments or less.