All You Need To Know About PPF Loans

Public Provident Fund or PPF has, for decades, been one of the most popular type of long term investment option. With the variety of advantages that it carries such as tax benefits and exemption from wealth, debt and liability tax, PPF accounts are easy to open and operate and offer a longer lock-in period for maximizing savings. Also, these investments are risk free and offer a modest rate of interest. However, among all the aforementioned benefits, not many people are quite aware that PPF accounts also come with a loan facility, which means that, account holders can avail a loan on their PPF account from the 3rd year of investing and till the end of the 6th year of investing.

Loan on ppf account

If you want to redo the furnishings of your house or wish to purchase a high end home theatre system, you always have the option of taking a personal loan. But personal loans, being mostly unsecured, will charge you a high rate of interest, sometimes as high as 14% to 16%. The interest alone can make quite a dent in your finances. If you are looking for alternative options to fund those purchases, you can always pursue the option of PPF loans.   If you have accumulated a fair amount in your PPF account over the years, then you are definitely eligible to take a loan on your PPF account.

However, before you  pursue this loan option, here are a few things which you must remember.

When Can You Take A Loan

As you know, a PPF account has a maturity period of 15 years. Before this period, account holders can only make partial withdrawals from their accounts 5 years from the end of the financial year in which the first subscription had been made. However, the facility of taking a loan on a PPF account is available from the beginning of the 3rs fiscal year up to the 6th fiscal year.

How Much Loan Can You Take

Account holders can avail a loan on their PPF account up to a maximum limit of up to 25% of the balance that is in their account at the end of the 2nd year, before the year in which the account holder has applied for the loan. For example, if the account holder has applied for the loan in the year 2015-2016, then they will get a loan up to an amount that is 25% of the balance in their PPF account at the end of the fiscal year 2013-2014. As mentioned earlier, the loan facility will only be available from the 3rd year to the 6th year. There will be no loan facility available from the 7th year onwards, as at the onset of the 7th year, the account holder can make partial withdrawals from their account.

Who Is Eligible To Avail A PPF Loan

A PPF account holder is eligible to take a loan on their account from the 3rd year and up to the 6th year of account opening. One needs to hold a regular account in order to avail this facility. Also, if the account holder has not made a minimum of one investment in one fiscal year for a minimum amount of Rs 500, they will not be eligible to avail the loan facility. Account holders can only have one loan on their PPF account in one year.

Interest On Loan

As compared to a personal loan, a PPF loan is a much more affordable option. The interest applicable on a PPF loan 2% more than the interest that is applicable on the PPF deposit. So, if the applicable interest rate is 8.7%, then the interest rate on the loan will be charged at 10.7% p.a.  Do remember that this interest rate is not fixed and will be subject to change if the PPF interest rate is increased. So, if the PPF interest rate is increased to 8.9%, then the interest applicable on the loan will also go up to 10.9% p.a.

Repayment of Loan

Repayment terms of loans on PPF are quite different from other loans such as personal loans or home loans.

  • A PPF loan must be repaid within a period of 36 months, counting from the first day of the month in which the loan had been sanctioned. For example, if the loan has been sanctioned on Jan 1, 2014, then it must be repaid by or before Jan 30, 2017.
  • The loan taker must repay the principal amount of the loan first. Following the successful repayment of the principal amount, the interest accumulated on the loan amount must be paid in a maximum of two monthly installments.
  • Repayment of the loan can be done either in one of more monthly installments or in lump sum.
  • If the interest amount has not been paid, following the payment of the principal amount, within the period of 36 months, then the amount of interest chargeable on the loan will be automatically deducted from the loan taker’s PPF account.
  • In the unlikely event that the loan taker has not paid the principal amount of the loan within the given period of 36 months, then the interest amount will be hiked by 6% above the rate of PPF. The amount of interest in this case will then be debited from the loan taker’s PPF account balance at the end of the financial year.
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