Loan Against PPF Account and How to Take: Interest Rate and Calculation

Availing of a loan can be a hectic process, especially if you take one for the first time, are self-employed, or have a bad credit score. However, there are ways to navigate this as well, and one such option is a loan against PPF. You must have heard about PPF, the Public Provident Fund, a fixed-income investment scheme offered by the central government for the citizens of India. If you have been investing in this scheme, then you can avail loan against your investment in the PPF account. Let's understand how this works in detail. 

The article will cover the following topics:

• What is a PPF account?
• What is a loan against PPF?
• Key features of loan against PPF
• Benefits of loan against PPF
• Risks involved in availing of loan against PPF
• Conclusion

What is a PPF account?

Public Provident Fund is a long-term saving scheme offered by the government to the country's people where anyone can regularly invest to generate a lump sum corpus at the end of the investment tenure. This is a guaranteed return investment scheme. 

The maturity of the PPF account comes after 15 years. This means you need to invest for 15 years regularly, and then the account will mature. Upon maturity, you can close the account and withdraw the entire amount, or you can extend the account for another five years or blocks of five years each. However, you do not have to make any further investments. The current interest rate on the PPF account is 7.1%, effective from 1.1.2023. 

You have to make a minimum investment of ₹ 500 in a year while the maximum in a year can be ₹150000. Against the investment made in the PPF account, you can also avail of income tax deductions under section 80C. 

You can partially withdraw from your PPF account after completing six years, that is, the 7th year onwards. While these are some of the key features of having a PPF account, there is another benefit, too: availing a loan against pf online. 

What is a loan against PPF?

A loan against PPF is a facility offered by financial institutions. You can avail credit facility against your investments in the PPF account before 7th year of the fund running. Let's take an example to understand this: 

Suppose you opened a PPF account in January 2022, so from January 2024 onwards, you can start availing loan against your PPF account until January 2027. So, basically, during the 3rd, 4th, 5th and 6th years from the start of the investment in the PPF account. 

Key features of loan against PPF

• You can get 25% of the PPF account balance for the second year immediately preceding the loan application date. This means if you are applying for a loan in January 2023, you will get up to 25% of the balance of your PPF account on 31.03.2021. 
• If you repay the amount entirely within the due time, you can opt for another loan. 
• Your PPF investment is eligible for loan disbursement from 3rd to 6th year of the PPF. 
• The loan against the pf interest rate is charged at 1% above the prevailing interest rate on the PPF account. So, at present, the PPF interest rate is 7.1%, and thus the interest on a loan against PPF will be 8.1%. However, this is subject to change as per the change in the interest rate of the PPF scheme. 
• If you delay repaying the loan for more than 36 months, then the interest will be increased to 6% more instead of 1%. However, if you pay the principal amount but the interest amount remains unpaid, the same will be deducted from your PPF account. 
• If you want to pay the principal amount in the beginning and then pay the interest amount, then you need to pay the interest amount within a maximum of two monthly installments. 
• All PPF account holders are eligible for loans against their PPF account. If you are worrying about how to take a loan against pf then you need to apply for a loan against your PPF account with the financial institution from where you have availed the PPF account. 

Benefits of loan against PPF

Availing loan against PPF has multiple benefits of its own, and here are the important ones –

• If you do not have anything to mortgage, like a property, or gold, but you need cash urgently, you can use this facility to tackle your financial crunch. 
• The repayment tenure is 36 months which is favorable for most borrowers as these loans are usually small amounts of loans which can be repaid within 36 months. 
• The interest rates are lower compared to other personal loans and mortgages. 
• You can repay the principal amount and the interest amount separately as well. 

Risks involved in availing of loan against PPF

While there are advantages of availing loan against PPF, there are certain risks as well, which are:

• The amount of loan that you can avail of will be very nominal. As you can avail from the 3rd year, where the maximum amount in your PPF account will be ₹3 lakhs plus the interest amount accumulated, 25% of that you can avail as a loan which may not serve your purpose well. 
• Since the interest rate on loan against PPF is 1% higher than the interest rate on PPF, you are losing 1% of the investment for the loan tenure. This will also affect the compounding factor, and your investment goals may get affected. 

Conclusion

All that said and done, a loan against PPF can come in handy, especially in times of need. Availing of this loan is easy and takes little time, which makes this a more convenient option for short-term credit facilities at lower interest charges and processing charges.