BAJAJ BROKING
March 20, 2025
6 mins read
A Public Provident Fund (PPF) account is a popular long-term savings instrument in India, offering tax benefits and attractive interest rates. Beyond serving as a secure investment avenue, a PPF account also provides the facility to avail loans against the accumulated balance, offering liquidity to account holders in times of need. This feature allows individuals to address financial requirements without disrupting their long-term savings plan.
Understanding the nuances of taking a loan against a PPF account is crucial for effective financial planning. It involves knowing the eligibility criteria, loan limits, interest rates, repayment terms, and potential implications on the account's growth. Being well-informed helps in making decisions that align with one's financial goals and obligations.
PPF is a government-backed savings scheme introduced in 1968 to promote long-term financial security while providing tax benefits to investors. It aims to mobilize small savings by offering an investment avenue with reasonable returns coupled with income tax benefits. The scheme has a tenure of 15 years, which can be extended in blocks of five years as per the investor's preference.
PPF investments also qualify for tax deductions under Section 80C of the Income Tax Act. Apart from that, the maturity proceeds and interest earned are also exempt from tax, making it an attractive option for long-term financial planning. The government revises the interest rate quarterly, ensuring alignment with prevailing economic conditions.
PPF account holders become eligible to apply for a loan against their PPF account from the 3rd financial year up to the end of the 6th financial year. [1] For instance, if an account was opened during the financial year 2020-21, the loan facility would be available from 2022-23 to 2025-26. The maximum loan amount permissible is 25% of the account balance at the end of the second financial year preceding the year in which the loan is applied.
The interest rate on such loans is 1% higher than the prevailing PPF interest rate at the time of loan application. This rate remains fixed throughout the loan tenure. It's important to note that the loan must be repaid within 36 months from the month it was approved, and failure to do so can result in higher interest charges.
Pro tip: If you have opened a Demat account for trading securities and long-term wealth creation, you can leverage these securities to obtain a higher loan amount with loans against securities.
Before opting for a loan against your PPF account, it is essential to understand the key features that define the terms and conditions of such loans:
Loan Amount – You can borrow up to 25% of the PPF balance at the end of the second financial year preceding the loan application. This ensures that only a limited portion of your savings is utilized.
Interest Rate – The applicable interest rate is 1% above the prevailing PPF interest rate. If the PPF interest rate is 7.1%, the loan interest will be 8.1% per annum.
Repayment Tenure – The loan must be repaid within 36 months (3 years) from the date of disbursement. Partial or full repayment can be made within this period.
Collateral Requirement – No collateral, mortgage, or security is required as the loan is secured against your PPF balance.
Impact on PPF Balance – Until the loan amount is repaid, the amount in the PPF account does not earn interest, affecting the overall growth of the savings.
Loan Availability – A second loan can only be availed after repaying the first loan. Loans cannot be taken against PPF accounts that have matured or are in an extended tenure.
The loan amount is determined based on the balance in the PPF account at the end of the second financial year preceding the loan application year. Specifically, an account holder can avail up to 25% of this balance as a loan. For example, if the account balance was ₹100,000 on March 31, 2021, the maximum loan amount eligible during the financial year 2023-24 would be ₹25,000.
This calculation method ensures that the loan amount is proportionate to the savings accumulated over time, allowing account holders to access funds while maintaining the integrity of their long-term investment. Moreover, since the loan amount is not calculated based on your credit score or income, you can access credit to meet urgent needs even with a poor CIBIL score or low income.
Understanding the repayment terms for a loan against a PPF account is essential to avoid penalties and ensure smooth financial planning. Below are the key points regarding the PPF loan repayment period:
Repayment Tenure – The principal amount must be repaid within 36 months from the first day of the month following the month in which the loan was sanctioned.
Repayment Mode – The loan can be repaid in one lump sum or in multiple installments, based on the account holder’s preference.
Interest Payment After Principal Repayment – Once the full principal amount is repaid, interest must be paid within two monthly installments at a rate of 1% per annum on the principal, calculated from the month following the loan sanction date.
Penalty for Late Repayment – If the loan is not fully repaid within 36 months, the interest rate increases from 1% to 6% per annum, applicable from the first month after loan disbursement until full repayment.
Automatic Deduction for Pending Interest – Any outstanding interest on unpaid loans beyond 36 months may be debited from the PPF account at the end of each financial year.
Liability in Case of Death – If the account holder passes away before loan repayment, the nominee or legal heir will be responsible for clearing the outstanding loan interest. This amount will be adjusted at the time of final account closure.
Low-Interest Rate: The loan is available at an interest rate 1% higher than the PPF interest rate, which is relatively lower compared to personal loans.
No Collateral Required: The loan does not require any collateral or security, simplifying the borrowing process.
Continued Investment Growth: The remaining balance in the PPF account continues to earn interest, ensuring ongoing growth of the investment.
Flexible Repayment Options: The loan offers flexibility in repayment, allowing for lump-sum payments or multiple installments within the tenure.
Limited Loan Amount: The loan amount is restricted to 25% of the PPF balance, which may not suffice for substantial financial needs.
Loss of Interest on Loan Amount: No interest is earned on the portion of the PPF balance equivalent to the loan amount until the loan is repaid.
Strict Repayment Terms: The loan must be repaid within 36 months, and failure to do so results in a higher interest rate.
Impact on Long-Term Savings: Taking a loan can disrupt the compounding benefits of the PPF account, affecting long-term wealth accumulation.
Apart from PPF loans, you can also leverage other investments in securities to obtain credit. Financial institutions often provide loans against shares, mutual funds, and bonds, allowing investors to access liquidity without selling their assets. To avail of such loans, investors can open a Demat account with a registered depository participant and trading account online.
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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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You can take a loan against your provident fund account, but only between the 3rd and 6th financial year from the date of account opening. The loan amount is limited to 25% of the PPF balance at the end of the second financial year preceding the loan application. After the 6th year, partial withdrawals are allowed instead of loans.
The maximum loan amount is 25% of the PPF balance as of the end of the second financial year preceding the loan application. For example, if you apply for a loan in the 2024-25 financial year, the loan amount will be calculated based on your PPF balance as of March 31, 2023.
The PPF loan repayment tenure is 36 months from the first day of the month following the loan sanction date. The repayment can be made in a lump sum or installments, and after full repayment of the principal, interest must be paid within two months. If not repaid within 36 months, the interest rate increases from 1% to 6% per annum.
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