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Loan against PPF

Any kind of saving is always appreciated and it always pays dividends. But what would happen if you need money urgently to acquire something indispensable or to address certain exigency?  Will you need to liquidate some investment? Would you borrow from a friend or family?

Well, you need to do neither of the two, if you have balance in your PPF account. 

Before we tell you about this, let us understand some basic points about a PPF account.

PPF account: Points to remember

• Public Provident Fund (PPF) is a tax-free savings scheme devised by the Govt. of India. Here you can deposit up to Rs 1.5 lakhs in a financial year. 
• The maturity period of a PPF account is 15 years (after the end of the relevant financial year). For example, if you made the initial subscription on September 11, 2013, your account will mature on 31st March 2029. 
• The interest paid on the savings made is notified by the Finance Ministry every year. The current PPF interest rate is fixed (for Quarter 1, FY 2019-20) at 8.0%. 
• Partial withdrawal is allowed only after 5 years (from the end of the relevant financial year). For example, if you made the initial subscription on September 11, 2014, you will not be allowed partial withdrawal before 1st April 2020.

What are PPF loans?

If you have balance in your PPF account, you are allowed to avail a loan against PPF at a highly competitive interest rate. The loan against PPF account is particularly beneficial for you if you want to avail short-term loans without any collateral. Many reputed lenders also offer attractive personal loan offers (such as loan against PPF SBI) in this category.

Tenure for loan against PPF

You must repay the loan amount within 36 months of borrowing, otherwise the rate of interest on the borrowed amount will increase from 2% to 6%.

Salient features of a loan against PPF 

Some of the key features related to a loan against PPF account are mentioned below:

• Any account holder of the Public Provident Fund (PPF) is eligible to avail a loan against PPF.
• In order to apply for a loan against PPF account, you should fill up the  Form D and submit the same to the bank or the post office where you have opened the PPF account.
• You can avail the loan facility any time between the 3rd financial year and till the closing of the 6th financial years of opening your PPF account. For example, if you opened a PPF account during the financial year 2017-18, then you can avail a loan against PPF account from 1 April 2019 (the beginning of FY 2019-20). You will remain eligible to avail the loan till the end of FY 2022-2023.
• You will not be allowed to avail a loan against PPF from the 7th financial year onwards. This is so because you will then be eligible for making partial withdrawals from your PPF account. You will no longer need to get a loan against PPF SBI.
• The interest on a loan against PPF account is charged @ 2% more than the interest provided by the Government on the balance of your PPF account. Usually, the interest paid on the savings made is notified by the Indian Finance Ministry every year. Accordingly, the interest rate for the loan against PPF will also be changed proportionally. But once the PPF loan interest rate is fixed, it will remain applicable till the completion of the loan tenure. For example, the current PPF interest rate is fixed (for Quarter 1, FY 2019-20) at 8.0%. If you availed a loan against PPF account with effect from 15th June 2019, the interest rate will be charged at 10 % per annum.
• The maximum loan amount you borrow should not exceed 25% of your account balance at the end of the 2nd financial year preceding the year in which you applied for the loan.  Confusing? This example will make it clearer for you-

Let us suppose that you have opened your PPF account on 20th June 2011 (FY 2012). Now, you are eligible to avail a loan against PPF account from the start of the 3rd financial year (from 1st April 2013 or FY 2014) till the end of the 6th financial year (31st March 2017 or FY 2017). 

Now, if you want to get a loan against PPF  during the period of 1st April 2013 to 31st March 2014- you will be granted a maximum loan amount equal to 25 % of your PPF account balance as on 31st March 2012.

• In case you fail to repay the loan against PPF within 36 months, the prevailing interest rate will be increased by 6% more than the interest you are earning on your PPF balance.
• You need to pay off the principal amount first, followed by the interest amount accrued. The interest amount needs to be repaid in a maximum of two monthly installments.
• Let us suppose that you have paid off the principal amount within the loan tenure, but a part of the interest amount still remains to be paid. In this case, the outstanding amount will be deducted from the balance of your PPF account.
• You can not avail a second loan against PPF account until you pay off the first one.
• You will not be eligible for this loan if you have not met the minimum subscription criterion (1 per year) or have not deposited the minimum amount of Rs 500 per year.  You must pay the arrear subscriptions and the requisite penalty amount if you wish to avail this loan.  
• You can get this loan only once a year. Even if you have paid off the loan amount within 2 months, you cannot avail another loan against PPF account in the same financial year.

What are the advantages of availing a loan against PPF?

There are manifold advantages of availing a loan against PPF account. We will discuss some of these here:

• Easy to avail - As per the Public Provident Fund Act of 1968, a loan against PPF account is considered you right. Banks/post offices cannot deny a loan to you. They do not check your credit history either, before granting a loan to you. 
• You do not require to pledge collateral or mortgage - You are not required to pledge any asset as collateral while taking a loan against PPF.
• Flexibility in Repayment – You can repay the loan anytime within 36 months. The timeline begins from the 1st day of the month following the month when the loan was sanctioned. For instance, if your loan was sanctioned on 22nd January 2019, the repayment tenure starts from the 1st of February, 2019.

Also, you can repay the principal amount either a lump sum or in 2 or more monthly installments.

• Low-interest rates – You can avail highly competitive interest rates with a loan against PPF account. Usually, interest rates in a loan against PPF are lower as compared to traditional personal loans from banks/NBFCs.

We would like to conclude here by saying that a loan against PPF or a loan against PPF SBI is a fantastic option that you may explore whenever you are in need of funds. There is no doubt that a loan against PPF account is a somewhat restricted facility in terms of the loan amount approved. But, it can be a really cheap alternative if you are looking for a small value loan.