The Buyt Desk
During a cash crunch, you need not withdraw your Public Provident Fund (PPF) account instead you can avail loan against PPF if you meet the eligibility.
The Public Provident Fund (PPF) is backed by the government of India and hence it is a risk-free long-term investment plan. This scheme offers very good interest rates and has tax benefits.
PPF account holders can make investments by paying a minimum of Rs 500 and a maximum of Rs 150000 which can be done through 12 monthly instalments or lump sum payments in a financial year. The term of this account is 15 Years. And you can extend it for 5 more years or in multiple of 5 years. For an extension, you need to make a written request within a year of the maturity date. PPF returns are completely tax-free.
Loan against PPF
PPF is one of the best, easiest and safest ways to invest your hard-earned money. It is an investment you should opt for as it is the most tax-friendly long-term savings product. Both the interest earned and maturity proceeds are tax-free and also you can claim a tax deduction under Section 80C of the Income Tax Act. When in need of funds during a cash crunch you need not withdraw an amount from PPF instead take a loan against PPF. Against the funds you have in your PPF account, you have the option to avail a personal loan at competitive interest rates. Your eligibility for a loan is based on your credit in the PPF balance.
Eligibility for loan
You can request the loan from the third to the sixth financial year of your PPF account. This means that if you have started your PPF account in 2020-2021 then you can avail loan against PPF from 2022-2023 to 2025-2026. The loan against PPF is a short-term loan and its term is maximum of 36 months.
Loan amount
The maximum loan amount that you can avail against PPF is 25% of the balance in your PPF account at the end of the year before the loan is requested. This means the maximum loan amount for loan requests made in 2022-2023 is 25% of the balance on March 31st, 2022. You cannot request a second loan until the first one is fully repaid.
PPF Withdrawals
You can partially withdraw money from your PPF account from the 8th year from the year you made your first contributions. You can withdraw up to half of the PPF balance and the same is exempted from income tax. You are eligible to make only one withdrawal per year. Along with your passbook, you need to submit an application for withdrawal to the bank or post office where you have your PPF.
Interest rate
The interest rate on the loan against PPF is 1% more than the interest received on the PPF account balance. Any change in the PPF account interest rate will also change the interest rate on loans against PPF accounts. The interest rate once set for a loan will not alter anytime through the loan term. So the interest rate remains the same until the repayment is done. When compared to other personal loans the interest rates on loan against PPF is the lowest.
Repayment tenure
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Loans against PPF do not need any collateral.
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The loan should be repaid within 36 months from the month of loan approval.
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The principal can be paid back in a lump sum or in instalments as per the comfort of the PPF account holder.
Tax benefits
Under Section 80C of the Income Tax Act, 1961, contributions made towards PPF accounts are deductible. The PPF has the EEE(exempt exempt exempt) classification and is one of the very few financial products under this classification. Invested money, returns and maturity proceeds are free of income tax.
Summing up
People invest in PPF as a retirement corpus. This long-term financial product is risk-free with good returns and tax exemption and is very popular among salaried people. As it has so many benefits, it is advisable to not withdraw until the term is over. PPF always outperforms inflation hence it is better if you allow your money to grow in this account. For urgent funds, you can avail loan against your PPF as interest rates are cheaper than other personal loans.
