In some of our earlier posts, we have discussed many great features of Public Provident Fund (PPF) account. We have shown how you can use PPF account as an excellent pension tool. We discussed the deposit limits and the benefits of opening PPF account for your children in another post. We know withdrawals are possible only from the 7th year of opening the account. If you need emergency funds from your PPF account before the 7th year, withdrawal rules won’t permit that. Is there a way where you can use your PPF funds in the 4th or 5th year? Yes there is. PPF rules allow you to take out loans against your PPF account from the 3rd year. Loan against PPF account is a facility that can provide you funds in case of emergency before the 7th year. In this post, we will tell you everything about PPF loans i.e. the loan rules, eligibility, repayment terms and applicable interest rates.
When can you avail PPF loan facility?
You can take loan from your PPF account one year from the end of financial year in which the account was opened (initial subscription was made) but before expiry of 5 years from the end of financial year in which the initial subscription was made. The maximum loan amount is 25% of the PPF balance at the end of second year immediately preceding the year in which the loan is applied for. Sounds confusing? Let’s consider an example.
Suppose you open your PPF account in October 2014, you shall be eligible for the loan facility from April 1, 2016. You can avail the facility till March 31, 2020. From April 1, 2016 to March 31, 2017, you can avail loan up to 25% of your PPF balance as on March 31, 2015. Similarly, From April 1, 2017 to March 31, 2018, you can avail loan up to 25% of your PPF balance as on March 31, 2016. And so on. From April 1, 2020, you will be eligible for withdrawals from your PPF account. Hence, no further loans are allowed.
The rationale is quite simple. You are allowed to take loans till such time you cannot withdraw from the PPF account. Since withdrawal is allowed from the 7th year (5 years after the end of financial year in which the PPF account was opened), no loan facility shall be available from the 7th year.
Who cannot avail the PPF loan facility?
You won’t be eligible for loan if you have not maintained minimum subscriptions (1 per year) or not made minimum payment to your PPF account. You need to revive the account by paying applicable penalty and arrear subscriptions before you avail loan facility.
Additionally, you will not be eligible for a fresh loan till such time you repay the earlier loan along with interest. This means you cannot have 2 PPF loans running at the same time. You have to repay the first loan before you take out the second loan.
PPF Loan Repayment
The PPF loan has to be repaid within 36 months. Interest rate applicable is 2% p.a. more than prevailing PPF interest rate. Hence, if the prevailing interest rate is 8.7% p.a., you will get the loan at 10.7% p.a. Let’s consider an example. If you PPF balance is Rs 6 lacs and you take out a loan of Rs 1 lac from your PPF account, you will have to pay interest at the rate of 10.7% p.a. However, at the same time, you will keep earning interest (8.7% p.a.) on the entire Rs 6 lacs of your corpus. Hence, the net loan cost is 2% p.a.
Please note, while comparing with interest rates for other types of loans such as personal loans, you must consider 10.7% for comparison (and not 2%). This is because you will keep earning 8.7% on your funds irrespective of whether you go for a PPF loan or any other type of loan.
The repayment of principal can be made in lump sum or monthly instalments. In a PPF loan, you first repay the principal amount. After repayment of principal, applicable interest has to be paid in not more than two monthly instalments. This is unlike EMIs (equated monthly instalments) where principal and interest are repaid (or paid) simultaneously.
In case you have repaid the principal but have not paid the interest (during the prescribed period of 36 months), the interest amount will be debited from your PPF account.
If the principal amount is not repaid within thirty six months, you will have to pay penal interest on the outstanding amount at 6% p.a. (above PPF interest rate) till such time the loan is repaid. The penal interest will debited from your PPF account at the end of each financial year.
What are the benefits?
Loan against PPF account is likely to be cheaper as compared to personal loans, credit card loans, car loans etc. Thus, in cases of emergency, loans against PPF account can prove to be a less expensive option. However, a housing loan is likely to be cheaper than a PPF loan. Secondly, you have flexibility in repaying the loan. You can repay the loan as you wish within those three years. Moreover, you will not require much documentation for taking out PPF loan. So, the process is likely to hassle-free and swift. Hence, this facility can be handy if you need the funds soon.
When should you use Loan against PPF account facility?
Ideally, you should never use it. PPF investments are typically used to build retirement corpus. This facility should be availed only in cases of emergency (medical) or to meet important life goals such as child education or marriage. You are advised to refrain from using the facility to meet lesser goals such as purchase of an expensive car or any other urges of entitlement (purchase of an item beyond your means because you think you deserve it).
Unnecessary debt must be avoided. Loan against PPF account is no different. You must plan in a way that you do not have to use the loan facility from PPF account. However, things do not always go as planned. Therefore, you must use this facility only in such unavoidable cases as medical emergency or when there are no other funding options available to meet important life goals. You must build enough emergency corpus and take wealth preservation measures (health insurance, vehicle insurance etc) that you don’t have to dip into your PPF corpus. Moreover, if you have taken the PPF loan, try to repay the loan as early as possible (even before 3 years) to save on interest cost.
Edited: For clarification on interest rate charged on PPF loan
Deepesh is a SEBI registered Investment Adviser and Founder, www.PersonalFinancePlan.in