Loans Against PPF Accounts: Key Things You Should Know About

While the PPF is a long-term investment with a 15-year lock-in period, the government has provided some flexibility to account holders who may face financial emergencies during this period

Any regular PPF account holder can apply for a loan against their PPF account, provided the account is within the specified time frame, i.e., between the third and sixth year of the account’s tenure.

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Loans Against PPF Accounts: Our investments help us maximise our returns, but some investments also help you borrow loans when you need funds urgently. The Public Provident Fund (PPF) is one of the most popular long-term investment options. With a tenure of 15 years, it offers a safe, risk-free, and tax-free return, making it an attractive choice for investors aiming for steady growth in their savings. A PPF account can be opened with a minimum deposit of Rs 500 and allows a maximum annual contribution of Rs 1.5 lakh. Besides helping investors cultivate the habit of saving, the PPF also provides a unique feature that allows account holders to take a loan against their PPF balance during the tenure of the account.

What is a PPF Loan?

While the PPF is a long-term investment with a 15-year lock-in period, the government has provided some flexibility to account holders who may face financial emergencies during this period. This is where the option of a PPF loan comes into play. A loan against a PPF account can be availed after the completion of one year from the end of the financial year in which the initial deposit was made and before the end of five years from the end of that financial year.

Key Features of PPF Loans

1. Eligibility: Any regular PPF account holder can apply for a loan against their PPF account, provided the account is within the specified time frame, i.e., between the third and sixth year of the account’s tenure.
2. Loan Amount: The maximum loan amount is limited to 25% of the balance available in the PPF account at the end of the second financial year preceding the year in which the loan is applied. For instance, if you apply for a loan in the financial year 2022-23, the maximum loan amount you can get is 25% of the balance in your PPF account as of March 31, 2021.
3. Repayment Terms: The loan must be repaid within 36 months from the first day of the month following the month in which the loan was sanctioned. The repayment can be made in a lump sum or in instalments, giving the borrower some flexibility.
4. Limitations: Only one loan can be availed of in a financial year. Even if the borrower repays the loan within the same financial year, a second loan cannot be taken until the next financial year. Additionally, no further loans can be taken until the first loan is fully repaid.

Benefits of Taking a Loan Against PPF

No Collateral Required

The PPF loan is essentially a personal loan and does not require the account holder to pledge any assets as collateral. This makes it a convenient option during financial emergencies.

Low-Interest Rate

The interest rate on a PPF loan is relatively low compared to traditional personal loans. The interest rate is just 1% per annum above the PPF interest rate, making it an attractive option for those needing funds.

Flexible Repayment and Tax Benefits

Borrowers have the flexibility to repay the loan in either a lump sum or in instalments, as per their convenience, over a period of 36 months. Since the PPF account itself is tax-free, the loan taken against it does not affect the tax benefits that the account holder enjoys.

PPF Loan Eligibility and Calculation

To be eligible for a PPF loan, the account must be active and fall within the third to sixth year of its tenure. The loan amount is calculated as 25% of the PPF balance at the end of the second financial year immediately preceding the year in which the loan is applied. This calculation is not based on the account holder’s income or creditworthiness, but strictly on the balance in the PPF account.

Taking a loan against your PPF account should only be taken when it is urgent. PPF is a long-term investment and is often used as a retirement benefit or for other crucial financial needs. If you are in urgent need of money and have no other options, you may consider this as one of the options to borrow funds.

The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar.