Loan Against PPF

What is Loan Against PPF Account?Loan Against PPF

A loan against a PPF account is a type of personal loan which is available for PPF account holders.  From the third year of investment in a PPF account banks, started offering this loan at a nominal interest rate.

This loan provides us with dual benefits, as it allows you to utilize your savings safely and provides financial assistance when required. Your  PPF savings account act as collateral, security against due to this the loan taken is considered secured and banks approve the loan easily. The best part of this loan is that we can avail of it when we need it most without paying a high-interest rate.

Key Features of a Loan against PPF Account

Some of the important features of a loan against PPF are listed below:

  •   25% of the loan amount is set as the upper limit of the accumulated balance in the PPF account at the end of the respective financial year. Thus, you can calculate a loan against PPF by considering 25% of the available PPF balance at the time of loan application.
  • The loan facility is provided till the sixth financial year. Investors can apply for the loan only after the PPF account reaches the third year.
  • The rate has to be fixed at 1% more on the loan than the accrued interest on the PPF balance. Thus, the interest on this loan is susceptible to changes and the current interest on PPF is 7.10% per annum.
  • After 36 months only the loan can be repaid in instalments.
  • If the loan is not repaid within a 36 months period, the interest rate will be increased to 6% more than the interest earned on the PPF account.
  • Firstly the principal loan amount must be repaid then the interest is paid in two instalments or lesser.
  •  suppose if the borrower only repays the principal amount within the specified loan period but not the accrued interest, the remaining amount will be deducted from his PPF account.
  • The account holders can partially withdraw from the PPF account if they want to but from the 7th financial year onwards,
  • You can apply for a second loan against PPF, only when the first loan is repaid completely.

Advantages of taking a loan against PPF account

At the time of a financial emergency, you can get easy access to funds by taking a loan against a PPF account. Such a loan can be beneficial for you in more than one way. Some of the advantages of availing a loan against a PPF account are given below:

  • No collateral required:  The PPF savings act as security. There is no need for collateral you can easily get the loan without pledging any asset as collateral or mortgage to the lending bank.
  • Low rate of interest:  Other personal loans have a higher interest rate as compared to loans against PPF.The interest charged on the loan against PPF is considered nominal.
  • Long repayment tenure: You can easily repay the loan within 36 months. Therefore, you can repay the amount within a tenure without having much burden on your monthly expenses. The repayment tenure begins from the very first day of the next month of the loan sanction.
  • Flexible repayment options: Loans taken against the PPF balance can be repaid in monthly instalments. Either you can pay the principal amount either in two or more instalments or at once.

How to Calculate Loan against PPF Interest Rate

The loan can be calculated manually against the interest rate or it can be calculated by an interest rate calculator.

Given below is an example to understand how to calculate a loan against the PPF interest rate.

Now, Suppose you have invested ₹ 20,000 every year for 5 years. So as per rule, you can avail the loan of 25% of the total PPF balance at the end of the third year. Now, you decide to take a loan against your PPF savings at the end of the third year. Let us see how you can calculate the numbers.

The current interest rate on PPF being 7.10%, the total balance at the end of the third year will amount to:
A = P(1+r)^t

Here, A is the maturity amount, P is the principal amount, R is the rate of interest and T is the tenure. Hence, the maturity amount = 20,000 (1+7.10)^3 = ₹ 1,06,28,820.Further, you can calculate loan against PPF using the following method:
25% * (Balance available at the time of applying for the loan)
=(25/100 *1.06 Cr )= ₹ 26,57,205

As you know, the interest charged on the loan is 2% more than the accumulated interest on the PPF balance, that is, 9.10% in this case.
Thus, the total interest payable on the borrowed amount will stand at (9.10/100 * 2.66 Lakh) = ₹ 24,180.52


When are you Eligible to take a loan against a PPF account?

You must have a Public Provident Fund account in a bank in order to be eligible to apply for a loan against PPF. You can take a loan against PPF between the third year onwards and the end of the sixth financial year from the date of opening your PPF account. After this period, you are eligible to withdraw partially from your PPF account.

How much amount can you withdraw?

From your PPF account, the maximum amount that you can withdraw or avail as a personal loan is 25% of the total amount in your PPF account. The PPF balance considered for this is the one that is accumulated by the closing of the second financial year prior to the year the loan was applied for.

What will be the interest charged on the loan?

The interest charged will be 2% more than the accrued interest on the balance in your PPF account if you take a loan against PPF. It means that the interest on the loan will also increase proportionately as the rate of interest increases. However, the interest rate charged on this type of loan is the lowest in comparison to the interest charged on other personal loans.

What will be the tenure of the loan?

The tenure on loan against the public provident fund is fixed at 36 months. The tenure will be calculated from the very first day of the month following the one in which the loan against PPF was sanctioned. In case you fail to repay the borrowed amount within the loan tenure, the interest charged on the loan will rise from 2% to 6% more than the interest earned on the PPF balance.