Need urgent money? How a loan against your PPF balance can help

New Delhi: A financial emergency may arise unexpectedly and without warning. It may be in the form of medical bills, house repairs, education-related expenses, and more. Such situations may force a person to take personal loans. While a personal loan is an option that can prove useful, the borrower should explore other options as well before deciding on one.

If the amount required is not large and can be repaid within a specified period, a loan against your Public Provident Fund (PPF) balance can be more efficient.

PPF is a government-backed savings scheme for long-term financial planning, offering tax benefits, guaranteed returns, and a 15-year lock-in period. The interest rates are decided by the government, while contributions range from Rs 500 to Rs 1.5 lakh a year. Deposits can be made either in a lump sum or in instalments.

It is a convenient and low-cost borrowing option that lets a person borrow a specified amount against their PPF balance within a specified period while preserving long-term savings. This way, the person does not have to take personal loans with high interest rates.

Borrowers must be aware of the conditions of the loan before applying. The amount that can be borrowed is limited; therefore, it should not be assumed that the entire amount available in the account is eligible for a loan. Moreover, there is a specified period within which a person may apply for a loan.

A person is eligible to apply for a loan from the third financial year after opening the account until the end of the sixth year. The amount that can be borrowed is also limited and should not exceed 25% of the total balance available at the end of the second financial year preceding the year in which the person applies.

Benefits

Once the loan is approved, the borrower has to repay the principal amount within 36 months, and the interest can be repaid in two monthly instalments after that. Thus, for the limited amount required, the person has up to three years to pay off the loan amount.

The interest charged on the amount borrowed is also relatively lower. The current rate of interest charged on the borrowed amount is 1% per annum above the prevailing PPF deposit interest rate. The current rate of interest earned on PPF investments is 7.1% per annum, which means the loan is charged at a rate of 8.1% per annum.

For a short-term financial need, a person does not need to take a personal loan, which usually charges a higher rate of interest, further burdening the borrower.

Moreover, the provision for taking a loan against the PPF balance allows a person to continue investing without applying for another hefty loan. The borrower does not have to break the PPF account and withdraw years of savings, yet can avail themselves of an easy, accessible, and small-sized loan for short-term needs.

However, the person may be charged a higher rate of interest for not repaying the loan amount within the 36-month period. The interest rate charged for late repayment is 6% above the prevailing PPF rate.

How to apply

A person may apply for a loan by submitting Form D along with a passbook or KYC documents to the concerned bank or post office.

A person is allowed to take one loan in a financial year and may apply for another only after fully repaying the previous loan, including the principal and interest.