Loan against PPF Account

You are looking for a small loan of Rs 1 lacs for purchasing new furniture for living room of your new house. The first thing that comes to mind is a personal loan. But you are aware that personal loans are quite expensive. The interest rates can vary from 14% to 18% p.a. or even higher. Moreover, it will be too much hassle for such a small loan.

You have been exploring other options. You don’t want to borrow from a friend or family. You think about liquidating some investment. While checking your investment documents, you come across your PPF passbook. You have been saving diligently in your PPF (Public Provident Fund) account for the last five years. You have been investing to save income tax under Section 80C of the Income Tax Act. Your PPF account balance is Rs 5 lacs. But you cannot touch your PPF account before 15 years.

You wonder only if you could do something with this balance in PPF account. Well, you can.

Are you aware that you can take a loan against your PPF account too? And that too at a reasonably low cost. In this post, I will discuss the loan facility against PPF account.

Before I jump to loan against PPF facility, let’s understand a few basic about PPF account.

The PPF account matures 15 years after the end of financial year in which the initial subscription was made. For instance, if you opened the account on June 15, 2011, your PPF account will mature on March 31, 2027.
The interest rate for the PPF account is notified by Ministry of Finance every year. The interest rate for FY2016 is 8.7% p.a. Your PPF balance earns interest at the notified rate for the entire year.
You are allowed partial withdrawal from PPF account five years from the end of financial year (FY) in which the initial subscription was made. For instance, if you opened the account on June 15, 2011, you can make partial withdrawal from your PPF account from April 1, 2017.
You can deposit a maximum of Rs 1.5 lacs in your PPF account per financial year. Excess amount deposited will not earn interest.

Given you opened your PPF account on June 15, 2011, you cannot make partial withdrawal before April 1, 2017.

Loan against PPF Account Facility

Even though you cannot make any withdrawal before April 1, 2017, you can take a loan against PPF account. You can avail loan facility from the beginning of 3rd FY till the end of 6th FY.

So, if you opened your account on June 15, 2011 (FY 2012), you can take loan from the beginning of 3rd financial year (FY 2014) i.e. April 1, 2013 till the end of 6th financial year (FY 2017) i.e. March 31, 2017. This was a simple way of understanding this.

Let’s look at a slightly complex way of presenting the same information. In fact, that’s how PPF Act, 1968 explains your situation:

You can avail loan against your PPF account after one year from the end of financial year in which the PPF account was opened.
You can avail loan against PPF facility only till the end of five years from the end of financial year in which the account was opened.
There shall be no loan facility available after March 31, 2017. The rationale is that after March 31, 2017 (April 1, 2017), you will be eligible to make partial withdrawals from your PPF account. Hence, there is no need for loan facility. Hence, you can avail loan facility from April 1, 2013 till March 31, 2017. No loan facility available from April 1, 2017.

How Much Loan Can I Take against My PPF Account?

The maximum loan amount is 25% of the your PPF account balance at the end of second year immediately preceding the year in which you apply for the loan. Sounds confusing, doesn’t it? Let’s try to understand with the help of an example.

Continuing with the above example, you can avail loan facility from April 1, 2013.

From April 1, 2013 to March 31, 2014, you can borrow up to 25% of PPF balance as on March 31, 2012.
From April 1, 2014 to March 31, 2015, you can borrow up to 25% of PPF balance as on March 31, 2013.
From April 1, 2015 to March 31, 2016, you can borrow up to 25% of PPF balance as on March 31, 2014.
From April 1, 2016 to March 31, 2017, you can borrow up to 25% of PPF balance as on March 31, 2015.

There shall be no loan facility available from April 1, 2017.

Can Everyone Avail Loan against PPF Facility?

Your account has to be regular for you to avail this facility. If you have not made minimum subscription (1 per year) or not deposited minimum amount per year (Rs 500), you cannot avail the loan facility. You need to revive the account by paying penalty and arrear subscriptions before you can take out loan.

Additionally, you cannot have two loans against PPF account outstanding at the same time. You need to close the first one before you take out the second loan.

You can take loan only once in a year. Even if you have repaid the loan within 2 months, you cannot borrow twice against your PPF account in the same FY.

What Shall Be the Applicable Interest Rate?

Applicable interest rate is 2% over the prevailing PPF interest rate. Hence, if the PPF interest rate is 8.7%, the interest rate will be 10.7% p.a. Please note that PPF loan interest rate is not fixed. If PPF interest rate is increased to 8.8% p.a. next year, the applicable interest rate will become 10.8% p.a.

Additionally, PPF loan is only against your PPF account and not from your PPF account. So, if your PPF balance before taking the loan was Rs 5 lacs and you took a loan of Rs 1 lac, your PPF balance stays Rs 5 lacs and continues to earn interest at prevailing PPF interest rate. You pay 2% above the PPF interest rate for Rs 1 lac you have borrowed. An interest rate of 10.7% p.a. is much lower than even the best personal loan in the market.

How Is PPF Loan Repaid?

The repayment procedure for PPF loan is very different from your home loans or personal loans.

The loan must be repaid within 36 months from the first day of the month in which the loan is sanctioned i.e. if you take the loan on June 15, 2014, you must repay the loan by June 30, 2017.
You repay the principal amount first.
After repayment of principal amount, the applicable interest (or calculated interest amount) has to be paid in not more than two monthly installments. Note: Under regular home loan EMI, interest and principal amount are repaid simultaneously.
Repayment can be made in lump sum or in one or more monthly installments.
If you have repaid the principal amount within 36 months of taking the loan but have not paid the interest, the interest amount shall be debited from your PPF balance at the end of 36 months.
If you have not even repaid the principal within 36 months, the applicable interest rate will increase to 6% above PPF rate (14.7% as per current PPF interest rate). The interest, in such case, will be debited from your PPF balance at the end of every financial year.

How to Apply for Loan against PPF Facility?

You can apply for the loan by filling in Form D and submitting to the post office or bank where you have opened your PPF account.

How Is Loan against PPF Better than a Personal Loan?

Loan against PPF is available at much cheaper cost as compared to a personal loan.
There is no prepayment penalty in repayment of PPF loan. There is no EMI pressure either. You can repay at any time within 36 months. Of course, the sooner you repay the lesser interest you have to pay.
Personal loans are fixed rate loans and typically have high prepayment penalty attached.
You will get PPF loan easily. Banks and post offices don’t check credit history before offering loan against PPF facility. In fact, it is your right as per PPF Act, 1968. Bank/Post Office cannot deny you this loan.

Issues with Loan against PPF

The loan amount is limited by your PPF balance.
You have a very small window of 4 years (from beginning of 3rd till the end of 6th financial year) when you can avail this facility. With personal loans, there is no such restriction.
Since you cannot deposit more than Rs 1.5 lacs per financial year in your PPF account and cannot take a loan from the 7th year, the loan amount cannot be very big.

Consider you opened your account on April 1, 2011. You can avail loan facility till March 31, 2017. You deposit a maximum of Rs 1.5 lacs in the PPF account every year till April 1, 2015. From April 1, 2016 to March 31, 2017, you can borrow up to 25% of PPF balance on March 31, 2015. Assuming PPF interest rate stays at 8.7% p.a. during the entire term, the balance on March 31, 2015 will Rs 7.42 lacs. Hence, the maximum loan you can take is Rs 1.85 lacs (i.e., 25% of 7.42 lacs). And this is the best case scenario. You are depositing the maximum amount (Rs 1.5 lacs) on day 1 of the financial year to earn maximum interest. Even then, the maximum loan amount is Rs 1.85 lacs. This amount is in the 6th year. For the earlier years, the loan amount will be much lower. Hence, only low value loans can be taken against PPF account.

PPF is meant for long term savings. If you cannot repay the loan on time, there is heavy penal interest (6% + 8.7% = 14.7%). In fact, in such a case, the loan amount will become at par with interest rates on personal loan. Additionally, the interest will be debited from your PPF balance, compromising your long term savings.

Conclusion

To be honest, if you were you, I wouldn’t take loan for furnishing my house. If I don’t have enough money, I will do it gradually over a period of time. Unnecessary debt must be avoided. However, in cases of actual emergency (or deemed emergency), you can explore the option of loan against PPF facility. Loan against PPF account is a very restricted facility in terms of amount and when you can avail this loan. But it can be a cheap alternative for small value loans. Always keep in mind that PPF account is meant for long term savings. As with any kind of debt, make sure you can repay the loan on time before you borrow.