Is It Wise to Opt for a Loan Against PPF?

Due to the several benefits of safety, returns, and tax savings it offers, the Public Provident Fund Scheme, also known as the PPF account, is one of the most popular long-term saving-cum-investment financial instruments.

The PPF was launched in the year 1968 by the Finance Ministry's National Savings Institute. Since the scheme's introduction, it has emerged as a powerful tool for creating long-term wealth for investors. The investors build their retirement corpus by regularly contributing to the PPF account over a long period of time. The PPF has gained immense popularity, especially among small savers, due to the attractive interest rates and tax benefits that it offers. PPF scores over other investment options mainly because it offers tax exemption under section 80C of the Income Tax Act, and the returns from PPF are also not taxable.

What is Loan Against PPF?

PPF account holders can avail of a Loan Against PPF from the available balance in their account. The PPF loan is offered at a 1% p.a. interest rate. It is offered without any collateral. The loan is ideal for individuals who want to borrow money in the short term and do not have any security for collateral.

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What are the key features of Loan Against PPF?

1. Any PPF account holder can opt for Loan Against PPF.

2. The PPF account holder can avail of a Loan Against PPF from the third to the sixth year of the opening of the PPF account.

3. The account holder can make a partial withdrawal of funds from the seventh year onwards.

4. The interest rate of the Loan Against PPF is 1% p.a., more than the interest earned on the PPF account. Hence, the change in the PPF interest rate results in a proportionate change in the interest rate of the PPF Loan. However, once the interest rate is set for a loan, it will remain unchanged till the end of the loan tenure.

5. The PPF Loan is offered for a short duration of 36 months. In case you are unable to pay off the loan within 36 months, the interest rate is increased to 6% p.a., more than the interest earned on the PPF account, instead of the 1% p.a. additional interest rate charged normally.

6. The borrower has to pay off the principal amount first and then pay the accumulated interest.

7. The interest needs to be repaid within two monthly instalments.

8. In case the principal amount is paid off, but the interest amount is due, it will be deducted from the borrower's PPF account balance.

9. One cannot avail of a second PPF Loan unless the first loan is completely cleared.

10. The amount of loan that one can avail of cannot exceed 25% of the amount available in the account at the end of the second year immediately preceding the year in which the loan is applied for.

What are the benefits of opting for a Loan Against PPF?

Loan Against PPF has several benefits over other types of loans. Here are some key benefits of taking a PPF Loan:

1. Attractive Interest Rate:

The Loan Against PPF is offered at an attractive rate of interest which is 1% per annum higher than what is earned on the PPF account. This interest rate is far lower compared to other types of loans.

2. No Collateral:

In PPF Loan, the available balance of the PPF account acts as a security. Hence, the borrower does not have to provide any collateral to avail of a loan facility.

3. Repayment Tenure:

The Loan Against PPF is a short-duration loan offered for 36 months. Since most borrowers consider it as a substitute for a personal loan, the loan amount is generally smaller. Besides, if the loan is not repaid within this tenure, you can still repay it with a higher interest rate.

4. Flexible Repayment:

The PPF Loan can be repaid either in a lump sum or in monthly instalments as per your convenience.

What are the downsides of opting for a Loan Against PPF?

As discussed, the interest rate charged on the PPF Loan is 1% higher than what is earned on a PPF account. However, the borrowers should bear in mind that they will not be making any interest on the PPF amount against which the loan is taken. The interest earned on the PPF account is tax exempted. Hence, the borrower will lose on the tax-exempted interest until the entire amount is repaid. Suppose your PPF account has Rs 5,00,000 balance amount. If you have taken a PPF Loan of Rs 3,00,000, you will continue earning interest only on the remaining amount, i.e., Rs 2,00,000. You will lose on the tax-free interest you would have earned on Rs 3,00,000. Therefore, before opting for the Loan Against PPF, you should consider this factor to determine the exact cost of the loan.

The PPF account has another benefit of compounding tax-free returns. By opting for a PPF Loan, you will not only lose on the tax-free interest but also the compounding benefit on the tax-exempted returns. Since the loan facility is offered in the early years of the PPF account opening, you will be losing on the compounding benefit, which will negatively impact your retirement corpus.

The Loan Against PPF is ideal for individuals looking for a short-duration loan for a relatively smaller amount. Since the amount of loan that one can avail of cannot exceed 25% of the amount that was available in the account at the end of the second year immediately preceding the year in which the loan is applied for, one cannot avail of a loan against the entire PPF balance. Hence, the PPF Loan is not suitable for individuals looking for a bigger amount of loan for a longer duration. In such a case, you should consider opting for a Loan Against Property, which can offer a large amount of loan for a longer duration by pledging your property.

To Conclude:

As the main purpose of the Public Provident Fund scheme is to provide individuals with a tax-free retirement corpus, it does not make sense to opt for a Loan Against PPF and lose on the compounding benefit and the tax-free interest. If you are in need of immediate funds, it is advisable to check for other loan options like Loan Against Property and calculate the exact cost of the loan after considering the compounding benefit and taxation. In case there is no other feasible option, and you are looking for a small amount of loan for the short-term, you can consider opting for a Loan Against PPF.

Warm Regards,
Ketki Jadhav
Content Writer