The Public Provident Provident Fund (PPF) scheme is a long-term investment plan backed by the government. It provides security with attractive interest rates and returns that are entirely tax-free.
Investment in PPF can be made through lump sum or 12 monthly payments throughout the course of the financial year with a minimum of Rs 500 and a maximum of Rs 1,50,000. In case of extension, a written request made within a year of the account’s maturity date, the account’s 15-year term may be extended for one or more blocks of five years without incurring interest loss.
PPF account holders can avail loan facility in case of cash crunch situation, if they meet the eligibility.
Loan against PPF
A PPF account holder is eligible to avail a loan after the third financial year, although this option is only available until the end of the sixth financial year. However, one cannot avail a loan for the complete amount. A maximum of 25% of the sum available at the end of the two years immediately prior to the year for which the loan is being requested may be borrowed.
According to the India Post website, “Loan can be taken up to 25% of balance to his credit at the end of the second year immediately preceding the year in which loan is applied. (i.e. if loan taken during 2012-13, 25% of balance credit on 31.03.2011)
According to the
FAQ, “Customers can avail of the loan facility between the third financial year to sixth financial year, ie. from the third financial year upto the end of the fifth financial year.”
Interest rate on loan against PPF
The loan from the PPF account has an interest rate that is 1% higher than the current in effect government-set interest rate. If you visit your local PPF branch right now to request a loan, the interest rate will be 8.1% (PPF interest rate is 7.1 percent).
Once the loan’s interest rate is determined, it will remain the same up to the repayment time.
Loan repayment period
A loan’s principal must be repaid in full within 36 months of the month the loan was approved, starting on the first of the month after that.
The principal amount of a loan should be repaid before the end of thirty-six months from the first day of the month following the month in which the loan was sanctioned. The repayment can be done in one lump sum or in two or more monthly instalments over the course of thirty-six months.
The repayment will be credited to the subscriber’s account.
According to the
website, “After the principal of the loan is fully repaid, the interest shall be repayable in not more than two monthly instalments at the rate of one percent per annum of the principal for the period of commencing from the first day of the month following the month in which the loan is drawn up to the last day of the month in which the last instalment of the loan is repaid.”
If the loan is not repaid or is only partially repaid within the allotted 36 months, interest will be charged at a rate of 6% instead of 1% each year from the first day of the month following the month in which the loan was received to the last day of the month in which the loan is ultimately redeemed.
Can withdrawals be made in addition to taking out a loan against the PPF account?
According to the rules for maintaining a PPF account, withdrawals and loans are mutually exclusive. Loans are available to account holders only between the third and sixth years of holding an active account, with partial withdrawals permitted beginning in the seventh year. This implies you can’t take out a loan after the seventh year, and you can’t make withdrawals before the sixth year.
Note that this plan was designed to encourage savings, and while loans and withdrawals are permitted to some level to allow some liquidity, the scheme does not, in general, encourage a reduction in savings potential.
It should be noted that only one loan can be taken in a fiscal year, and the second loan will not be issued until the first loan is repaid. The loan can be taken only once per year, even if the loan is returned in the same year because the loan amount is fixed for each year.