Loan Against PPF Account

1. All subscribers of PPF are eligible for these loans.
2. Account holders can avail this loan facility between the third and sixth financial year of opening PPF account. So, for example, if an account was opened by an individual during the financial year 2016-17, then a loan can be availed from 1 April 2018, which is the beginning of the financial year 2018-19.
3. The loan can be taken till the end of the financial year 2021-2022.
4. Starting from the 7th financial year, the account can be partially withdrawn from.
5. 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. Considering the above example, if the account holder wishes to take a loan as soon as he/she is legally allowed to do so, his/her maximum loan capacity will be 25% of the balance as on March 2017.
   

1. Interest is charged at 1% more than the interest earned on the balance in the PPF account. Therefore, when there is an update in the interest rate of PPF account, the interest rate on the loan will also see a proportional change. But once the interest rate is set for a loan, this rate will be applicable till the end of the tenure.
2. 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 (instead of the additional 1% interest rate charged normally).
3. 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.
4. It is not possible to avail a second loan on the PPF account until the first one has been paid-off completely.
5. 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.

Case study on taking loan against PPF account

Let us consider a scenario wherein Mr. A opened a PPF account in January 2010:

Financial year 1: April 2009 - March 2010 (Account opened within this timeframe - in January 2010)

Financial year 2: April 2010 - March 2011

Financial year 3: April 2011 - March 2012 (Can take a loan starting in this year)

Financial year 4: April 2012 - March 2013

Financial year 5: April 2013 - March 2014

Financial year 6: April 2014 - March 2015 (Can take a loan only up to this year, as next year will qualify for partial withdrawals)

Financial year 7: April 2015 - April 2016 (Mr. A can begin withdrawing from his/her PPF account from this date)

Advantages of taking a loan against PPF account

Availing a loan against your PPF account can be advantageous in many ways. Here are some of the key benefits of doing so:

1. 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.
2. 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. For instance, if the loan was sanctioned on 25th January 2018, then the loan tenure of 36 months starts from the 1st of February, 2018.
3. 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.
4. 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.

Although loan against PPF charges a very low interest rate than other loan options available in the market, various experts say that loan against PPF is not a correct option to avail.

The following are the reasons behind this:

1. The primary reason is the loss of interest income. From the time you have availed the loan and till the time you have completed the full and final settlement, you will not earn interest income on your PPF account. As we have already mentioned that the interest income is tax free, if you avail a loan against PPF, you are likely to lose out that income.
2. Another reason is the loan amount is limited. As the loan can be availed in the initial years of opening the PPF account and the loan amount is limited to 25%. 
3. You are also likely to lose the compounding benefit on the interest income of the PPF account because interest is not payable at the time of the loan tenure which will affect the overall returns from the scheme.

Various Aspects of Loan Against PPF Scheme

The following are the various other significant aspects of taking loan against PPF account balance:

1. The maximum repayment tenure is 36

1. No interest will be earned on PPF account balance until the loan is repaid
2. Interest should be paid off in one or two installments after repayment of the principal amount
3. The interest rate for the loan against PPF account would increase from 1.00% to 6.00% if the repayment of loan not done within 36 months
4. The applicable interest rate on loan taken against PPF account after 12 December 2019 is 1.00%. The rate of interest is 2.00% if the loan was taken before this date

Why Should I Avoid Loan Against PPF?

The following are the reasons why you should avoid taking loan against PPF account balance other than in case of emergencies:

1. No interest earned on the PPF account balance: No interest will be earned from the time loan is applied till the loan is repaid. The interest income is tax free which cannot be obtained if a loan is taken. Hence, the interest paid during repayment of loan is the interest income along with 1.00%.
2. Limited loan amount can be availed: Only a limited portion of the PPF amount can be availed as loan, which 25% of the total corpus of the PPF account.
3. Loss of compounding benefit of the interest income: Beneficiaries will not earn any compounding benefit on the interest income, as the interest payout does not happen during the loan tenure, which impacts the overall returns obtained from the scheme.