Things to Know About Public Provident Fund (PPF), PPF, also known as the Public Provident Fund, is one of the most well-liked investment alternatives in India. The popularity of PPF may be attributed to a number of factors, including guaranteed returns, tax advantages on the amount invested, and tax-free returns.
However, several features of this tax-saving investment are not fully known, despite the fact that millions of Indians use PPF investments to reach long-term financial objectives.
PPF Calculator: To maximize your PPF investment, consider using a PPF calculator to estimate potential returns based on different contribution scenarios.
The Employees' Provident Fund (EPF) is a method for employees to save money. It is a programme that the Employees' Provident Fund Organisation (EPFO) oversees in accordance with the Employees' Provident Funds and Miscellaneous Provisions Act, 1952.
A set proportion of the employee's wage must be given to the EPF plan, and the employer must also contribute a similar amount. Upon retirement or two months after changing employment, the employee receives a lump sum payment with interest that includes both his own and the employer's contributions.
PPF is a long-term investment plan, therefore you could occasionally require money for expenses. If you just require a portion of the assets in your PPF, you can do so. However, these withdrawals are permitted once the account has been invested in for six years. A loan against PPF is an option if you want money before this time.
If you want money before investing for six years, the PPF loan facility is available. Between the third and the fifth year after the account is opened, you can borrow money against a PPF account. Up to 25% of the amount in the PPF account two years prior to the loan application can be borrowed.
The loan you take out will include interest charges. The interest rate for loans secured by PPF is 1%. This rate was once 2%, however it was later reduced to 1%. From the first day of the month the loan is taken out until the final day of the month it is returned, interest would be computed on the loan amount.
Between the third and sixth fiscal years following the creation of the PPF account, a loan against PPF may be taken out. The account user can begin taking partial withdrawals from their PPF account after the seventh year.
A loan of up to one-fourth of the account amount at the end of the second fiscal year after the loan application year may be obtained.
PPF loans are available many times. Prior to obtaining the second loan, the first loan must be repaid in full.
The interest charged on the PPF loan is 1% more than the interest accrued on the PPF account. Therefore, any modification to the PPF interest rate will likewise have a direct effect on the PPF loan interest.
The PPF loan account has a three-year maximum loan term.
Within three years, the PPF loan account must be closed. The PPF loan interest applicable will rise by an additional 5% over the interest collected if the PPF account holder does not repay the loan within three years. This will result in a 6% increase in the overall PPF interest rate above the interest earned.
The subscriber is required to pay back the entire loan amount, plus interest, within the loan term. The outstanding loan sum is taken from the borrower's PPF account balance if the principal is paid back but the interest payments are not made on time.
Eligibility for a loan against PPF
The maximum amount that may be borrowed is 25%, or one-fourth of the PPF account balance at the end of the second year, or in the year before the loan was sought.
For instance, a subscriber who deposited the maximum amount of Rs. 1.5 lakh for the first two years after starting their account would have a balance of Rs. 3 lakh plus interest. Therefore, a PPF loan of 25% of the account amount, or Rs. 3 lakh plus interest, may be obtained. As a result, the PPF loan eligibility grows yearly. After the seventh year, the PPF account holder is permitted to partially withdraw up to 25% of the account amount from the year before the loan was applied.
Despite having one of the lowest interest rates among the loan choices on the market, many financial experts think that loans against PPF accounts should be avoided. Here are a few of the explanations:
The lack of interest revenue is the primary cause. Your PPF account does not generate any interest revenue between the time you apply for the loan and the time it is returned. By taking out a loan against your PPF, you lose out on the tax-free interest income. As a result, the real interest you pay on the loan is equal to the PPF account's interest income + 1%. As a result, if you borrow money at the current interest rate of 7.4%,
The second reason is that the loan amount is limited. Since the loan is available in the initial years of opening the PPF account and is limited to 25%, the loan amount is quite limited
You also lose the compounding benefit on the interest income of the PPF account since interest is not paid during the loan tenure. This affects the overall returns from the scheme negatively
When applying for a loan, a person might determine the amount of a loan against their PPF by taking 25% of the available PPF balance into account. When the PPF account enters its third year, a PPF investor may request for this loan. Keep in mind that a loan is available up until the sixth fiscal year.
Between the third and sixth financial year after starting the account, account holders are allowed to take out a loan against their PPF account. The people are then only permitted to take a portion of the money from their PPF account.
Ans. Only 25% of the total investments made at the end of the second fiscal year prior to the year in which the loan application was filed may be withdrawn.
Given these reasons, a loan against PPF should be avoided but if you are in need of funds at a low interest rate, you can opt for the facility. A loan against a PPF account is cheaper than a personal loan and easily allows funds for your emergencies. So, understand the terms and conditions associated with the loan and then avail it if needed.