As we are witnessing job losses and salary cuts across sectors due to the nationwide lockdown imposed to prevent the spread of the pandemic COVID 19, many of you might be facing a cash crunch. You may have to dip into your emergency fund and if you don’t have one, you might as well have to dip into your savings. Many of you may not be aware that you can avail a loan on your public provident fund (PPF) account balance by paying interest at the rate of 1%. Although it may look like a very low rate of interest but as you will have to forgo the interest that you would have earned on the PPF loan amount, the actual cost of loan will be higher. Therefore, your actual cost of loan will be rate of interest on PPF that you forgo plus 1%. As the PPF interest rates are revised on a quarterly basis, the government has recently notified the PPF rates down to 7.1% for the quarter ending June 2020. Therefore, your effective rate of interest on PPF loan amount will be 7.1% plus 1%. It is way cheaper than a personal loan which can range from 12-18% per annum.
Although, it may look like a good option than a personal loan but should you be going for it?
Lets understand how much loan you can avail and why availing loan against your PPF balance shouldn’t be your first choice.
How much loan can you avail?
You can get a loan from the third year and till the sixth year after opening the PPF account. The amount of loan is limited to 25% of the balance that stood in the PPF account of the person at the end of 2nd year or the year preceding the year in which loan has been applied.
So for example, if you have been investing ₹1.5 lakh (maximum limit) per year for the initial two years, then you will have a balance of around ₹3.1 lakh at the end of the second year including the interest. Although the interest on PPF is calculated on a monthly basis and credited at the end of the year we have done a calculation on the annual balance just for the sake of simplicity. We have assumed an interest rate of 7.1% per annum.
If you apply for a loan in 3rd year, you will be eligible for a loan amount of ₹56,081 that is 25%*3.1 lakh. So, you can’t take a loan beyond this amount, if you have applied in the third year. The eligibility will increase if you apply in fourth, fifth or sixth year as you are likely to have higher balance.
You will have to repay the loan amount within 36 months of availing it. The repayment can be done through a lumpsum payment or two monthly instalments. After the principal is repaid the interest at the rate of 1% has to be paid in two monthly installments or through a lumpsum payment.
If you are willing to apply for this loan, you can approach your bank or nearest post office with Form “D”.
Should you go for it?
PPF is a long-term investment which most of the people do for their retirement. Therefore, ideally you shouldn’t liquidate your long-term investments to cater to short-term cash requirements.
“I do not think this is a good idea as one will lose out the compounding effect in the long term. PPF provides tax free ,risk free returns which beat inflation and hence one must look at other alternatives for their financial needs,” said Mrin Agarwal, founder director, Finsafe India Pvt. Ltd.
“Also, given the amount is very low in absolute terms, it may not be an amount one can rely on for meeting their cash requirements,” she added.
However, if you don’t have any other option you may go for it as the rate of interest is low.
