Loan against PPF account balance - Key features, pros and cons

Public Provident Fund (PPF) is one of the most popular investment options in India, largely due to higher interest rates and complete Income tax exemption.

However, a lesser known feature is that one can obtain a collateral-free personal loan against PPF balance available at 1% interest rate.

We gain an insight on the key features, pros and cons of this product.

Key features

• The significant features of taking a loan against your PPF account are as follows:

• Account holders can avail this loan facility between the 3rd and 6th financial year from when PPF account was opened. The loan ends in the 6th FY since starting from the 7th financial year, the PPF account can be partially withdrawn.

• The loan amount is capped at 25% of the balance at the end of the second financial year preceding the year in which the loan was applied for.

• Interest is charged at 1% more than the interest earned on the balance in the PPF account. Once the interest rate is set for a loan, this rate will be applicable till the end of the tenure.

• In case the loan against the PPF account is not paid off within 36 months, the applicable interest rate will be hiked to 6% more than the interest earned on the PPF balance.

• The principal amount needs to be paid off first, followed by the interest accumulated. The interest amount should also be repaid in two monthly installments or lesser.

• If the principal is repaid within the loan tenure, but there is a portion of the interest amount that remains to be paid, then the outstanding amount will be deducted from the PPF account balance of the individual.

• It is not possible to avail a second loan on the PPF account until the first one has been paid-off completely.

Pros

• No collateral or mortgage required - You will not be required to pledge any asset in the form of a collateral when taking a loan against your PPF account.

• Repayment tenure of 36 months - The loan can be repaid within 36 months. This timeline is calculated from the first day of the month following the month in which the loan is sanctioned.

• Low interest rates - This is one of the most significant benefits of availing a loan against your PPF account. Interest rates are far lower than those of traditional personal loans from banks.

• Flexibility in repayment - The repayment of the principal amount of the loan can be done either in two or more installments (on a monthly basis) or as a lump sum.

Cons

• PPF loan is available at 1% interest rate but you will forego the interest accumulation on the loan amount. So the actual cost of a PPF loan is PPF interest rate plus 1%. At the current interest rate, a PPF loan would effectively cost you 8.1%.

• The time period is very limited. It may not be practical for some investors to require funds at such an early stage, except in case of emergencies

• You lose the compounding effect on the interest amount foregone due to the loan. WAs PPF loan is available in the earlier part (between 3rd and 6th FY), the compounding effect of the interest foregone will be much high at the time of maturity.

• Cumbersome compliances: PPF is largely a Government instrument and availing this loan carries considerable paperwork and compliances, as compared to a personal loan which is available in 3 seconds nowadays!

Conclusion

All in all, the loan against PPF balance has numerous restrictions while giving an attractive interest rate.

PPF should be seen as a retirement fund and withdrawals/ loan should be avoided, unless in case of emergencies.

However, it can prove to be better than a personal loan where interest rates sore as high as 20% p.a.

The information is purely general in nature and not intended to be an investment or financial advice. Please consult a professional for any advice before taking any action.

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