The Public Provident Fund (PPF) scheme is a fixed income investment scheme which is available for investment for the general public. The scheme allows you to save regularly over a long term period and create a guaranteed corpus. Moreover, if you are in need of urgent funds, you can avail a loan against PPF account at low-interest rates. However, before we discuss the loan against PPF, let’s have a look into the PPF scheme –
Features of the PPF scheme
Here are some of the salient features of the Public Provident Fund Scheme
- This is a long term saving scheme which runs for 15 years. You can extend the tenure in blocks of 5 years after maturity
- The interest rate payable on the PPF account is fixed by the Government and also reviewed regularly. The current interest rate, with effect from 1st October 2020, is 7.4%. Interest is compounded annually and added to the deposited amount
- Investments into the PPF scheme are eligible as deductions under Section 80C up to Rs.1.5 lakhs. Moreover, the returns earned and the maturity proceeds are also completely tax-free in nature
- You can open a PPF account with authorized banks and post offices
- The minimum deposit amount is Rs.100 while there is no maximum limit
- One PPF account is allowed in the name of one individual
- Resident Indian citizens can open a PPF account in their name
- One deposit is required every financial year to keep the PPF account active
Loan against PPF
PPF is a long term investment scheme and sometimes you might need funds for financial needs. PPF allows partial withdrawals if you need funds for your needs. However, such withdrawals are allowed after the completion of six years of investment into the account. If you need funds before this period, you can resort to a loan against PPF.
The facility of loan against PPF is available if you need funds before completing six years of investment. You can get a loan against a PPF account between the third and the fifth year of opening the account. This loan can be taken for up to 25% of the balance in the PPF account two years before which the loan application is made. For example, if you open a PPF account in 2019-20 and apply for a loan in 2024-25, you would be able to avail 25% of the PPF account balance in the year 2022-23. Moreover, if you repay this loan fully, you can avail a second loan too before the sixth year of opening the PPF Account.
The loan that you avail would carry an interest expense. The loan against PPF interest rate is 1%. Earlier this rate was 2% but then the rate was lowered to 1%. Interest would be calculated on the loan amount for the duration of the first day of the month in which the loan is taken to the last day of the month in which the loan is repaid. For example, if you take a loan against PPF account on 20th June 2020 and repay it on 12th October 2020, the loan against PPF interest rate of 1% would be charged from 1st June 2020 to 31st October 2020.
Besides the loan against PPF interest rate, here are other aspects of the loan which you should know –
- The repayment tenure of the loan is a maximum of 36 months
- After the principal amount of the loan is paid, the interest should be paid off within one or two instalments
- If the repayment of the loan is not done within 36 months, the loan against PPF interest rate would increase to 6% from 1%
- Until the loan is repaid, the PPF Account balance does not earn any interest income
- If the loan is taken before 12th December 2019, the interest rate would be 2%. If, however, the loan is taken on or after 12th December 2019, the applicable interest rate would be 1%
So, though a PPF account allows a loan, you should know the details of the same before you avail the loan.
Though loan against PPF account has a very low-interest rate compared to other loan options available in the market, many financial experts believe that loan against PPF should be avoided. Given below are some of the reasons why –
- The first reason is the loss of interest income. From the time that you avail the loan and till the time the loan is repaid, your PPF account does not earn any interest income. Since the interest income is tax-free, availing a loan against PPF makes you lose out on this income. Due to this, the actual interest that you pay on the loan is the interest income of the PPF account plus 1%. So, if the current interest rate is 7.4% and you avail a loan, the effective loan against PPF interest rate would come down to 8.4%.
- The second reason is that the loan amount is limited. Since the loan is available in the initial years of opening the PPF account and is limited to 25%, the loan amount is quite limited
- You also lose the compounding benefit on the interest income of the PPF account since interest is not paid during the loan tenure. This affects the overall returns from the scheme negatively
Given these reasons, loan against PPF should be avoided but if you are in need of funds at a low-interest rate, you can opt for the facility. A loan against a PPF account is cheaper than a personal loan and easily allows funds for your emergencies. So, understand the terms and conditions associated with the loan and then avail it if needed.