In an earlier post, we had discussed a quick and cheap way to get a loan, Loan against your PPF account. Even though the loan window is open for only a short period and the loan amount is not likely to be very big, a PPF loan is an option if you are looking for a small loan.
Recently, the Government of India came out with new rules for PPF accounts. In fact, the PPF accounts will now be governed under Public Provident Fund Scheme, 2019. Most of the old rules have been retained. There are only a few minor changes with respect to number of deposits allowed per financial year and premature closure rules. We wouldn’t go into those changes. We write about loans on this blog and hence will focus on changes with respect to rules for PPF loan.
There has been a beneficial change in PPF loan rules. Before we discuss that, let’s do a quick recap of PPF loan rules. For a more detailed discussion on PPF loans and various pros and cons, refer to this post.
Loan against PPF Account: Recap
You can take a loan against your PPF account from the beginning of third year till the end of 6th year. The way years are counted is a bit confusing. The beginning of third year means One year from the end of financial year in which you opened the PPF account. The end of 6th year means 5 years from the end of financial year in which the PPF account was opened.
For instance, if you opened your PPF on October 14, 2015 (FY2016), you can take loan from April 1, 2017 (FY2018) until the end of March 31, 2021 (FY2021).
Your borrowing depends on the accumulated PPF balance. You can borrow up to 25% of the PPF account balance at the end of previous financial year.
Continuing with the above example,
- From April 1, 2017 until March 31, 2018: You are borrow up to 25% of the PPF account balance as on March 31, 2016.
- From April 1, 2018 until March 31, 2019: You are borrow up to 25% of the PPF account balance as on March 31, 2017.
- From April 1, 2019 until March 31, 2020: You are borrow up to 25% of the PPF account balance as on March 31, 2018.
- From April 1, 2020 until March 31, 2021: You are borrow up to 25% of the PPF account balance as on March 31, 2019.
What Are the Changes That Have Been Brought in for PPF Loans?
Earlier, the rate of interest charged for PPF loan was 2% over the PPF interest rate. Now, this interest rate has been reduced to 1% over the PPF account interest rate. Therefore, if the PPF interest rate is 8% p.a., then the PPF loan interest rate shall be 9% p.a. (earlier it would have been 10% p.a.). Clearly, this is a beneficial change.
Note that PPF interest rate can change every quarter. Therefore, your loan interest rate will go and up with PPF interest rate. So, if the PPF interest rate goes to 8.2% next quarter, you will have to pay 9.2% on the loan in that quarter.
You must note PPF loan is repaid in a very different manner as compared to a regular loan. There is no concept of EMIs. First, you repay the loan in up to 36 months. You can pay the principal lumpsum or in instalments. Once the principal is repaid, your interest amount is calculated. You must pay the interest amount in up to 2 monthly installments.
If the principal is not repaid within 36 months, the interest rate goes to 6% over the PPF interest rate (instead of 1%) and the interest is debited from the PPF account balance at the end of each financial year. Therefore, non-payment of principal amount can get very expensive. This excess of 6% is charged since the beginning of the loan (and not just after completion of 36 months).
If the principal is fully repaid but the interest is not paid in due time, the interest is debited from your PPF balance.
There Is a Change in PPF Loan Form Too
Earlier, you could apply for the PPF loan by using Form D. Now, you will have to use Form 2. Here’s the form from PPF regulations. You can get this form from the bank where you have opened your PPF account.
The latest regulations do not provide a form for loan principal repayment and interest payment. Earlier, Form B was used for such loan payments. You can expect some clarification on this front soon.