Public Provident Fund: Should you take a loan against your PPF account?

The Public Provident Fund comes with various benefits along with its tax benefits and the advantage of compounding of returns. According to the changes made in the scheme last year, any loan will be charged at the rate of 1 per cent per annum instead of 2 per cent earlier, taken from or after December 12, 2019. However, even though at 1 per cent, the interest rate on the PPF loan is much cheaper than any other type of loan, experts suggest not to go for it.

The Public Provident Fund (PPF) is a popular investment option among investors due to its tax benefits – it enjoys the EEE status (exempt-exempt-exempt), i.e., the investor’s money is exempt from taxes at the time of investment, accumulation as well as withdrawal.

If you take a loan against your PPF account, you will lose out on the tax-exempt interest amount that you earn on your PPF. Even though you will be charged at the rate of 1 per cent p.a. on the loan taken from the PPF account, no interest will be paid on the PPF account (up to the extent of the amount of loan you have taken) till the time you repay the principal amount along with the interest.

Hence, know that while taking a loan against the PPF account, you lose out on the tax-exempted interest. This way the effective interest rate charged on loan from your PPF account is the rate of prevailing PPF interest rate plus 1 per cent. However, the balance amount in the PPF account continues to earn interest.

It is also suggested not to take a loan against PPF is because of the smaller amount of loan one can take and the criteria it comes with. For a PPF loan, an account holder can take a loan after the expiry of 1 year from the end of the year in which the account was opened but before the expiry of 5 years from the end of the year in which the account was opened. This means you can take a loan from the 3rd year of opening of account till the 6th year of opening of the account. Once this period of the loan is over, the PPF accountholder cannot take a loan from the account. This limits the tenure of the loan as compared to other loan options.

Additionally, the amount of loan that you can avail also cannot exceed 25 per cent of the amount that was available in your PPF account at the end of the 2nd year, directly preceding the year in which the loan is applied for.

Loan on the PPF account is usually for relatively smaller amounts and for shorter tenures. For instance, if you have opened your PPF account in July 2019-20, your loan facility will start from the 3rd year of the opening of the account, which is 2021-22 and will continue till the 6th year of opening of the PPF account, which is till 2024-25. If you decide to take a loan in the 5th year, you will be eligible for a loan of 25 per cent of the amount available in account 2 years preceding the year in which loan the loan was applied. So if you have applied for a loan on 2023-24, you will be eligible for 25 per cent of the closing balance in 2021-20, which will be around Rs 1.3 lakh. For most this will be a small loan amount and not suffice.

Comparatively, opting for a home loan or a loan against property will be a better option for borrowers looking for larger loan amounts, with a longer tenure.