Loan Against PPF - Know All About Using Your PPF Account as a Short-Term Home Loan

PPF, often known as Public Provident Fund, is a retirement savings scheme provided by the Government of India. The main aim of this scheme is to offer a secure post-retirement life to everyone. A PPF account is one of the most tax-friendly instruments for long term savings as maturity proceeds and interest are exempt from tax. Moreover, it also enjoys tax deductions under Section 80C. 

Apart from all these benefits, do you know that you can use your PPF account as a short-term home loan? As a PPF account holder, you can avail of a loan on the basis of the PPF balance standing to your credit. 

In order to gauge a better understanding of raising a short-term home loan against PPF, read this article till the end!

Loan Against PPF Account

Public Provident Fund accounts allow the subscribers to take personal loans against the available balance in the account at a highly competitive rate of interest. This is exceptionally advantageous for individuals who wish to apply for short-term loans without pledging any of their assets as collateral. 

In other words, we can say that you can effortlessly take a personal loan against the balance in your PPF account. This can prove to be very handy, especially when the loan is raised for a short period of time. Also, the interest rate offered on loans is very competitive. 

Critical Features of a Loan Against PPF Account

The key features of taking a loan against your Public Provident Fund or PPF account are as follows:

1. All Public Provident Fund account subscribers are eligible for these loans. 

2. Starting from the 7th financial year, the account can be partially withdrawn.

3. Account holders can avail of the loan facility between the 3rd and 6th financial year of opening the PPF account. So, for instance, if an individual opens an account during the financial year 2020-21, then a loan can be availed from 1 April 2022, which is the beginning of the financial year 2022-23. The loan can be taken till the end of the financial year 2025-26. 

4. The loan amount is capped at 25% of the balance at the end of the second financial year preceding the year in which the loan was availed for. As per the example above, if the account holders are willing to take a loan as soon as they are legally eligible to do so, their maximum loan capacity will be 25% of the balance as of March 2021. 

5. Interest is charged at 1% more than the interest earned on the balance on the PPF account. Therefore, when there is an update in the rate of interest of the PPF account, the rate of interest on the loan will also see a proportional change. But since the interest rate is set for a loan, the same rate will be applicable till the end of the tenure.

6. If the loan against the PPF account is not paid off within 36 months, the applicable rate of interest will be raised to 6%more than the interest earned on the PPF balance. 

7. In case the principal amount is repaid within the loan tenure, but there is a portion of the interest amount that remains unpaid, then the outstanding amount will be deducted from the individual’s PPF account balance.

8. An individual cannot avail of a second loan on the PPF account until and unless the first one has been paid off entirely.

9. It’s mandatory to first pay off the principal amount, followed by the accumulated interest. The interest amount must also be repaid in 2 monthly instalments or less. 

Why Take a Loan Against PPF Account?

Are you confused regarding whether or not to take a short-term home loan against the PPF account? If yes, we have an answer for you that will ease your decision-making process. 

Well, availing a loan against your Public Provident Fund account can be beneficial in multiple ways. Here’s a listicle of key advantages of doing so:

1. Low Rate of Interest

One of the most significant benefits of taking a loan against your PPF account is that it involves low-interest rates. The interest rate is far lower than those of traditional personal loans from banks or financial institutions. 

2. No Mortgage or Collateral is Needed

While availing of a loan against a PPF account, you will not be required to pledge any asset in the form of collateral. 

3. Flexibility in Repayment

Flexibility in repayment is another noteworthy benefit of availing of a loan against a PPF account. The repayment of the principal amount of the loan can easily be made either in two or more instalments on a monthly or lump-sum basis. 

4. Repayment Tenure of 36 Months

Lastly, taking a loan against a PPF account offers you the benefit of 36 months of repayment tenure. This means that the loan can be repaid within 36 months. This timeline is calculated from the initial day of the month following the month in which the loan is sanctioned. For example, if the loan is sanctioned on 25th January 2019, a loan tenure of 36 months starts from 1st February 2019. 

Also read: Importance of Cibil Score for Home Loan