Shireena, is the only parent to her 7-year-old daughter Meera. She works as a consultant at one of the law firms in Mumbai. Due to a medical emergency she’d drained her savings, lost track of her finances and now with the start of Meera’s academic year, was falling short of Rs 40,000 for her school fees.

After enquiring for available short-term loans viz. personal loan, she realised that the interest charged is too high (13%-15%) and it wouldn’t be a prudent decision. Beside there is a service charge and the entire process demanded paper work.

So, Shireena, perplexed owing to the situation, met her Certified Financial Guardian who suggested, why not take a loan against Public Provident Fund (PPF) account.

Yes, you can take a loan from the fund in case a need arises. You don’t have to wait too long till you become eligible for withdrawals from the PPF account.

The PPF rulebook states: “Notwithstanding the provisions of paragraph 9, any time after the expiry of one year from the end of the year in which the initial subscription was made but before expiry of five years from the end of the year in which the initial subscription was made, a subscriber may, he so desires, apply in Form D or as near thereto as possible, together with his pass book to the Accounts Office for obtaining loan…”

In, Shireena’s case she had opened her PPF account in August 2015. So, the end of financial year when the initial subscription was made is March 31, 2016. The expiry of ‘one year from the end of that financial year in which the subscription was made’ brings us to March 31, 2017.

Hence, from March 31, 2017, until ‘before expiry of 5 years from the end of the year in which the initial subscription was made’  i.e. 5 years from March 31, 2016 – which brings us to March 31, 2021 – made her entitled to apply for a loan against her PPF balance.

Therefore, to simply put, from the second year of opening the PPF account to the sixth year, as a PPF account holder you can take a loan against the account.

How much loan can be availed against the PPF account?

“… A subscriber may, he so desires, apply in Form D or as near thereto as possible, together with his pass book to the Accounts Office for obtaining loan consisting of a sum of whole rupees not exceeding twenty five per cent of amount that stood to his credit at the ends of the second year immediately preceding the year in which the loan is applied for”, states the PPF rulebook.

At the end of second year preceding the year in which loan is applied, one can apply for upto 25% of that balance, rounded to the nearest whole rupee.

In Shireena’s case she’d applied for a loan in June 2017, the financial year of loan application is FY 2017-18. The second year preceding this year is 2015-16. She can take a loan of up to 25% of the balance standing to her credit at the end of this FY 15-16.
 

Financial Year	Year-end Balance	Eligibility	Amount eligible
2015-16	1,50,000	No	Nil
2016-17	2,00,000	No	Nil
2017-18	3,50,000	Yes	37,500 (25% of 1,50,000)
2018-19	4,50,000	Yes	50,000 (25% of 2,00,000)
2019-20	5,00,000	Yes	87,500 (25% of 3,50,000)
2020-21	5,20,000	Yes	1,12,500 (25% of 4,50,000)
After 2021 till Maturity		No	Nil

Note this is an illustrative example
(Source: PersonalFN Research)

So as per the table above, Shireena is eligible for a loan upto Rs 37,500 this year. The balance Rs 2,500 needed to manager her daughter’s school fee, would have to arrange vide a hand loan from friends or any other sources.

What about the repayment of loan against PPF account?

The loan needs to be repaid with interest at 2% per annum within 36 months, either in lump-sum or in instalments. If the principal is fully repaid, the balance for the interest should be defrayed in two monthly instalments.

In case you fail to repay after 36 months, penalty will be charged at the rate of 6% over your PPF rate. So, with the current rate of interest of 7.9% on PPF, the loan repayments after a period of 36 months will cost you 13.9% p.a. on your loan amount —which is very close to the rate charged on personal loans.

Further, if you fail to repay your interest entirely in next two months post the end of your loan term then the same will be deducted from your PPF account balance.

Is a second loan against PPF account possible?

Yes, you can take a second loan against your PPF account before the end of your sixth financial year, but the second loan can be taken only once you’ve fully settled your first loan.

Please note the PPF money is technically illiquid until the 7th year of your account opening; meaning, you can’t ‘withdraw’. Only starting from your seventh year you’re eligible for partial withdrawals (vide application in Form C) every year. But before that, you can avail for loan against your PPF balance.

Are there any other conditions to be met before applying for a loan against PPF?

• You can apply for a loan only once in any particular financial year.
• You will be ineligible for the loan if the minimum mandatory investment/contribution of Rs 500 towards the PPF account was not made in past.

To conclude…

Loan against PPF account can be availed for variety of reasons such as a wedding in the family, further studies of your children, and so on.  However, you should avail such a loan only when you are falling short of your finances and do not have any better option. Loan against PPF should not be availed to improve your life style or to buy a costly gadget. After all, this is the money that you have kept aside for your retirement, which is one of the vital financial goals.

The contributions/investments made to the PPF account, will earn you tax-free interest and the contributions are eligible for a tax deduction under Section 80C of the Income-tax Act. Plus, the maturity proceeds are exempt from income-tax. But keep in mind your liquidity needs, interest rate scenario, risk profile and inflation before investing your hard-earned money in PPF.

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