Small Savings Schemes is one of the best options that help you in times of crisis.
One such Small Savings Scheme is Public Provident Fund (PPF), which other than being a long-term savings option, also allows you to take a loan in case of an emergency.
PPF accounts allow the subscribers to take personal loans against the available balance in the account at a competitive interest rate. This is beneficial for individuals who want to apply for short-term loans without pledging any asset as collateral. The interest rate offered on the loan is also very competitive.
- All subscribers of PPF are eligible for taking such loans.
- If the account is in the name of the minor, in that case, the guardian may apply for the loan on their behalf.
- The principal loan amount must be repaid first and then the interest, to be paid in two installments or lesser.
- 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
- In case the borrower repays the principal amount within the specific loan tenure but not the accrued interest, the outstanding amount will be deducted from his PPF account.
- From the 7th financial year onwards, account holders can partially withdraw from the PPF account.
Case study on taking a loan against PPF account
Let us consider a scenario wherein Mr. A opened a PPF account in January 2010:
Financial year 1: April 2009 – March 2010 (Account opened within this timeframe – in January 2010)
Financial year 2: April 2010 – March 2011
Financial year 3: April 2011 – March 2012 (Can take a loan starting in this year)
Financial year 4: April 2012 – March 2013
Financial year 5: April 2013 – March 2014
Financial year 6: April 2014 – March 2015 (Can take a loan only up to this year, as next year will qualify for partial withdrawals)
Financial year 7: April 2015 – April 2016 (Mr. A can begin withdrawing from his/her PPF account from this date)
When can you take a loan against a PPF account?
You must have a Public Provident Fund account in a bank in order to be eligible to apply for a loan against PPF. You can take a loan against PPF between the third year onwards and the end of the sixth financial year from the date of opening your PPF account. After this period, you are eligible to withdraw partially from your PPF account.
How much can you withdraw?
From your PPF account, the maximum amount that you can withdraw or avail as a personal loan is 25% of the total amount in your PPF account. The PPF balance considered for this is the one that is accumulated by the closing of the second financial year prior to the year the loan was applied for.
What will be the interest charged on the loan?
Interest is charged at 1% more than the interest earned on the balance in the PPF account. Therefore, when there is an update in the interest rate of PPF account, the interest rate on the loan will also see a proportional change. But once the interest rate is set for a loan, this rate will be applicable till the end of the tenure.
How many loans can be taken?
You can take only one loan in a Financial Year. It is not possible to avail as a second loan on the PPF account until the first one has been paid off completely.
What will be the tenure of the loan?
The tenure on loan against the public provident fund is fixed at 36 months. The tenure will be calculated from the very first day of the month following the one in which the loan against PPF was sanctioned. If the loan is repaid within 36 months of the loan taken, the loan interest rate @ 1 percent per annum shall be applicable. And if the loan is repaid after 36 months of the loan, the loan interest rate @ 6 percent per annum shall be applicable from the date of loan disbursement.
Advantages of taking a loan against PPF account
Availing of a loan against your PPF account can be advantageous in many ways. Here are some of the key benefits of doing so:
No collateral or mortgage required - You will not be required to pledge any asset in the form of collateral when taking a loan against your PPF account.
Repayment tenure of 36 months - The loan can be repaid within 36 months. This timeline is calculated from the first day of the month following the month in which the loan is sanctioned. For instance, if the loan was sanctioned on 25th January 2018, then the loan tenure of 36 months starts from the 1st of February, 2018.
Low-interest rates - This is one of the most significant benefits of availing a loan against your PPF account. Interest rates are far lower than those of traditional personal loans from banks.
Flexibility in repayment - The repayment of the principal amount of the loan can be done either in two or more installments (on a monthly basis) or as a lump sum
PPF is a long-term investment that most people do for their comfortable retirement. Therefore, it would not be a smart move to liquidate your long-term investments to cater to short-term cash requirements. Since PPF provides tax-free and risk-free returns which beat inflation and hence one must look at other alternatives for their financial needs. However, if you do not have any other option you may go for it as the rate of interest is considerably lower.