Public provident fund or PPF is a long term savings commitment that an investor makes for probably to meet out sunset financial needs. But as times are, anytime you can face crisis situation and may be in need of short term funds and in such a situation, PPF can be an easy go to option. Here are all the aspects discussed around loan against PPF:
1. Eligibility for loan against PPF:
For applying for loan against PPF, your PPF account needs to be active. So, needless to say here a deactivated PPF account will be ineligible for loan. The deactivation can be for reason such as failure to pay minimum annual contribution.
2. Timeline when PPF loan can be applied for:
After PPF account opening, subscriber of PPF account for PPF loan which is a short term loan from 3rd to 6th year.
3. Interest rate is 1% but the cost is huge
Interest rate is 1 percent but as one has to forego the interest earnings on PPF, the actual loan cost shall be higher i.e. PPF interest rate plus the 1% interest that you pay on PPF loan. Now it is way cheaper than personal loan which is still higher, considering the current PPF rate of 7.1 percent.
In case loan is taken, PPF subscriber will not get any interest (to the extent of the amount of loan taken) till the time principal amount plus interest is repaid.
4. Loan tenure
36 months i.e. repayment against the borrowing has to be begun after the period of 36 months or 3 years.
5. Repayment
If the subscriber fails to repay the loan amount taken against PPF, interest rate becomes 6 percent while all other norms remain applicable till the loan is fully cleared. The repayment can be done through a lumpsum payment or two monthly instalments. After the principal is repaid the interest at the rate of 1% has to be paid in two monthly installments or through a lumpsum payment.
6. Loan amount you can get
Against PPF, a maximum of 25% of the balance in the PPF account of the subscriber as at the end of the 2nd year or in the previous year in which the loan has been applied.
Supposing, you have been investing the maximum allowed limit of Rs. 1.5 lakh for the first 2 years and then the balance shall be Rs. 3.1 lakh This is for simplicity that we have taken as else the interest calculation on PPF is done monthly and credited at the end of the year. And hence the loan amount shall be 25% of Rs. 3.1 lakh that equates to Rs. 56081. But in the following year, your loan eligibility shall increase.
7. How to apply for such a loan?
For applying a loan against PPF, you can visit the nearest post office or bank with the Form D. The same can be down loaded from the respected bank’s or post office website. Say for SBI the link is this
8. Should you go for loan against PPF?
Ideally this pool is created over the years for retirement years and one hence should not liquidate investments. Nonetheless, it can be looked upon as a last resort.
Also, one may lose on the compounding effect in the long run and also there is a minimum cap on the amount which can be secured as loan here. Also, PPF with tax free returns and ‘EEE’ tag is able to beat inflation so it should not be a preferred choice.
