Loan against PPF: 7 things to know

1. Loan not available against full deposit
A PPF account holder is eligible to avail of a loan after the third financial year, although this option is only available until the end of the sixth financial year. However, one cannot avail of a loan for the complete amount. A maximum of 25% of the sum available at the end of the two years immediately prior to the year for which the loan is being requested may be borrowed.

2. Interest rate on loan
The loan from the PPF account has an interest rate that is 1% higher than the current in effect government-set interest rate. If you visit your local PPF branch to request a loan, the interest rate will be 8.1% (PPF interest rate is 7.1 per cent). Once the loan’s interest rate is determined, it will remain fixed till the repayment time.

3. Loan repayment period
The principal should be repaid in total within three years of the month the loan was approved. The principal amount of a loan should be repaid before the end of 36 months from the first day of the month following the month in which the loan was sanctioned. The repayment can be done in lump sum or in two or more monthly installments over the course of three years. The repayment will be credited to the subscriber’s account.

4. Partial or non-repayment of loan
If the loan is not repaid or is only partially repaid within the allotted time, interest will be charged at 6% instead of 1% each year from the first day of the month following the month in which the loan was received to the last day of the month in which the loan is ultimately redeemed.

5. Withdrawals
According to the rules, withdrawals and loans are mutually exclusive. This means that loans are available to account holders only between the third and sixth years of holding an active account, with partial withdrawals permitted beginning in the seventh year. This implies you can’t take a loan after the seventh year, and you can’t make withdrawals before the sixth year.

6. It’s scheme to save more
This plan was designed to encourage savings, and while loans and withdrawals are permitted to some level to allow some liquidity, the scheme does not, in general, encourage a reduction in savings potential.

7. Cap on loans
It should be noted that only one loan can be taken in a financial year, and the second loan will not be issued until the first loan is fully repaid. The loan can be taken only once a year, even if the loan is returned in the same year because the loan amount is fixed for each year.